
    Frank B. Baird, Respondent, v. Erie Railroad Company, Appellant, Impleaded with Union Iron Company of Buffalo and Buffalo Union Furnace Company, Defendants.
    Fourth Department,
    December 29, 1911.
    Equity — reformation of instrument to express intention of parties —' mutual mistake as to legal import of terms used — Statute of. Frauds — sealed instrument — suit to reform by party not named — constitutional law — interstate commerce — impairment of obligations of contracts — costs — extra allowance.
    Where it appears that the real intent of the parties to an agreement was that a railroad company in consideration of the granting of a right of way should give favorable switching rates to the grantor for the benefit of his premises and to a lessee of the grantor for a specified period, but the contract as actually drawn by reason of a mistake of law failed to express the real contract, in that the lessee of the grantor was the only party named as entitled to the switching rates, equity will reform the written contract so as to express the true agreement of the parties.
    If a written instrument fails to express the intention which the parties had in making the contract which it purports to embody, equity will grant relief, affirmative or defensive, although the failure may have resulted from a mistake as to the leg-d meaning and operation of the terms employed.
    
      The reformation of the written contract to correct the mistake as to the legal import of its terms is not prevented on the theory that the real contract, not being in writing, is void under the Statute of Frauds. This is so, because the parties supposed the written instrument did express then- real intention, and when the mistake is corrected the contract no longer rests in parol.
    Equity will correct such mistake, although the instrument is under seal and the owner for whose benefit the switching rate was intended, is not named in the instrument, for the actual agreement was that the owner should have the benefit of the agreement as a covenant attaching to and running with its land. Moreover, where the owner for whose benefit the agreement was made furnished the material consideration by granting the railroad a right of way, it or its assignee, under the doctrine of Lawrence v. Fox, is entitled to the benefits of the contract, including a right to have the written contract reformed to express the real intention of the parties.
    Where in a suit to reform such contract there is no proof that any shipments made under the switching agreement were interstate shipments, it cannot be contended that the agreement was invalid as allowing rebates on freight charges contrary to the Federal statute.
    Nor is the reformation of such contract in equity barred by reason of the fact that subsequent to the violation thereof the State passed a statute declaring rebates unlawful. The correction when made dates back to the time of the original contract and, it seems, that the State statute if given a retroactive effect would be invalid in so far as it deprived a party to the contract of a fight of action which had already accrued for the breach thereof.
    In an action to reform such contract and to recover overcharges, evidence examined, and held, sufficient to establish a mistake in the written contract in expressing the true intention of the parties, so as to authorize a court of equity to reform the contract.
    In an action to reform such contract an additional allowance is proper. McLBraAM", P. J., dissented, with memorandum.
    Appeal by the defendant, Erie Railroad Company, from a judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of Erie on the 8th day of May, 1911, upon the decision of the court rendered after a trial at the Erie Special Term, and also from an order entered in said clerk’s office on the 4th day of May, 1911, granting the plaintiff an extra allowance.
    
      Adelbert Moot [Helen Z. M. Rodgers with him on the brief], for the appellant.
    
      Simon Fleischmann and George C. Riley, for the respondent.
   Robson, J.:

Plaintiff’s recovery represents the ' amount of overcharge paid by the Union Iron Works, Buffalo, 1ST. Y., a corporation, -to the defendant Erie Railroad Company for switching service between the 13th day of September, 1899, and the 10th day of October, 1900. This claim was assigned by the receiver of the former company to plaintiff. The action is brought by plaintiff as such assignee and also as assignee of the rights and claims of the Union Iron Company of Buffalo under the contract hereinafter referred to. If a recovery of any sum is warranted, the amount is not in controversy.

The defendant Union Iron Company is an old company, which as far back as 1810 owned and still owns a large tract of land in the southeastern part of Buffalo, which has long been known, and is now known, as the Union Iron Works. This land lies south of and adjoining the Erie tracks and south of and adjoining this parcel is the Farmers Point parcel owned by the Erie Railroad Company. The Union Iron Company in about 1892 leased to plaintiff the southerly portion of its lands. Plaintiff for some time before that had actively interested. himself with the purpose of developing, or rather reviving, active business on the whole parcel, which had then reached a low ebb under the management of the owner and others formerly interested in the various enterprises there represented. Largely through his active instrumentality a blast furnace was erected on the leased premises and put in operation, the company taking and conducting that business being the Buffalo Furnace Company, to which plaintiff assigned his lease. This company began operations early in 1893. He was an officer of the company. We do' not deem it necessary to detail the various relations which the witness Thomas bore to the present defendant, Erie Railroad Company, and its predecessor, the New York, Lake Erie and Western Railroad Company, either as receiver and president of the latter, or as president of the former. It is sufficient to say that he was at all times fully authorized by his position to act for the interests now owned by the Erie Railroad Company. The company he represented will hereafter be reférred to as the Erie, whatever may have been its actual name at the time.

The Erie had at the time plaintiff began his operations on these premises no access by its lines to its Farmers Point property. It was desirous of securing such access. Plaintiff was desirous of obtaining favorable switching'rales for the furnace company, negotiations looking to those results culminated in a proposed switching rate contract in form between the Erie and the Buffalo Furnace Company. This was only a tentative agreement; and was never executed, though it had the approval of plaintiff and Brunn, the local division superintendent of the Erie. A tentative right of way agreement giving to the Erie a right of way to the Farmers Point property across these premises of the Union Iron Company was also prepared, but never executed. Troubles came thickly upon both the Buffalo Furnace Company and the Erie in that year; and negotiations were suspended until late in 1894, or early in 1895. Meanwhile plaintiff had in contemplation the erection of another furnace on another parcel of these premises, referred to as parcel B, distinct and separate from the Buffalo Furnace property. He had several interviews with Thomas in which, as he testifies, he told Thomas of his plans for building the 'B furnace, showed him blue prints of the proposed location and Thomas made suggestions as to an advantageous change in the location of some of the proposed structures. He also testifies that he then told Thomas that the new furnace was not to be controlled by the Buffalo Furnace Company; that it was to be entirely separate from the Buffalo Furnace plant; and that the Union Iron Company, the owner of the land, was to be interested financially to a large apiount in the proposed furnace. If Thomas was so advised at that time, and the court upon satisfactory evidence has so found, it is important in determining the question as to what furnaces the actual agreement as to the switching rates thereafter determined upon, it was agreed the rates should apply. Plaintiff testifies that the agreement was that these rates should apply to two furnaces on the premises by-whomsoever they 'might be operated. This is not directly disputed. His purpose in obtaining these rates was manifestly to have them apply to two furnaces, one, that already built and then operated by the Buffalo Furnace Company, and the other, the one he was then contemplating building on parcel B. It does not appear that the Buffalo Furnace Company then or thereafter contemplated building another furnace on the parcel it held under its lease. The switching rate would benefit the Buffalo Furnace Company so far as its plant was ■ concerned, and be of equal advantage to the operators of the proposed plant and incidentally to the landlord, the Union Iron Company, in the increased rental value of its land and the increase in the profits presumably to accrue from its intended investment in the proposed enterprise. Plaintiff for the Union Iron Company at the .suggestion of Wilbur, its president, asked for the rate to apply to three furnaces and a steel plant on the property in return for the grant of the desired right of way to the Erie. To this Thomas would not agree. He says, however: “We were willing to make a switching contract to the Buffalo Furnace and to another one to be built there, but to extend that indefinitely would be to extend that to a cost which we could not estimate and possibly far beyond its value.” This is at least some corroboration of plaintiff’s claim that Thomas then knew that it was proposed to erect another furnace on the premises. Thomas also testifies that the switching privilege, • whatever it was that was given to the two furnaces, was the consideration of the granting of the right of way. Shortly afterwards the right of way agreement was made and duly . executed. It will be observed that the" party who conveyed this right, thus furnishing the large proportion of the consideration for the switching agreement, was the owner of the land, the Union Iron Company. The Buffalo Furnace Company, the lessee, as a party to this contract consented to the. granting of the right of way; but its right in the premises, being limited by the six or seven years then remaining of its lease,, its surrender of right was in value inconsiderable in comparison with that conveyed by the Union Iron Company. • It is conceded that the term ultimately agreed upon during which the Erie should do the switching for the two furnaces, one erected and the other to be erected, as we have seen was fifteen" years. But the. Buffalo Furnace Company’s interest in the premises would expire long' before the termination of that period. It does not seem probable that either party to the agreement understood that the switching agreement should apply to and he for the benefit only of the Buffalo Furnace Company and its successors and assigns. This brings us to the decisive question of fact in the case, did the agreement as made apply only to two furnaces on the premises which were in fact operated by the Buffalo Furnace Company, its successors or assigns, or did it apply to two furnaces on the premises by whomsoever the same might be operated ? Though the right of way agreement and the switching contract were unquestionably in effect a single transaction, the one supplying the consideration for the other, the latter was not prepared and finally executed until some three months after the execution of the former. But the fact that some contract for favorable switching rates was to be given by the Erie was never questioned. Several drafts of such an agreement were prepared by the Erie and submitted for examination. It is noticeable that one of the earlier, possibly the earliest, of these drafts which it prepared was in form between the Erie and the Union Iron Company; and except for some omissions, intentional or mistaken, not affecting the contract in determining what parties should be benefited thereby, this proposed agreement was in form as plaintiff claims Thomas agreed it should be. This in itself tends to corroborate plaintiff’s version of the agreement actually made by the Erie in return for the right of way agreement. But this, or a similar draft of the contract, was forwarded by defendant to Brunn, its division superintendent, at Buffalo; and he at once suggested that the contract should be with the Buffalo Furnace Company, and not the Union Iron Company. It is apparent from the evidence that Brunn was not then aware of the result of the negotiations following those he had himself in part conducted in 1892-3, nor that an actual agreement had been made, even as to the right of way. Tet at that time the right of way agreement had been fully executed for more than a month. He also suggested leaving out two railroads, to which switching was to be done at the reduced rate, a suggestion that was taken up promptly later by the Erie officials. One of these tentative drafts was also drawn in form between the Erie and plaintiff personally. After considerable dispute and effort to get the switching contract in form, Thomas, for the Erie, turned the whole matter over to Merrill, a new officer of the company, having no personal knowledge of any of the prior details. Plaintiff and he had further discussion and dissension; the former insisting• that the contract should be in the form agreed upon by Thomas and himself, and Merrill, following Brunn’s suggestion, contending that the contract should be with the Buffalo Furnace Company. Finally late in February Merrill gave a proposed draft of contract to plaintiff in form like the one finally executed, except as to a clause thereafter added as a result of an interview between plaintiff and Wilbur, the president of the Union Iron Company. The parties named in the contract were the Erie and the Buffalo Furnace Company. This draft plaintiff took to Wilbur; and they were advised by an attorney to whom it was submitted for instructions that, as drawn, it applied only to two furnaces on the premises which should be operated by the Buffalo Furnace Company, its successors of assigns. This was what Wilbur would not accept, nor was it what plaintiff had agreed to receive, nor Thomas agreed to give, for the right of way agreement. Thereafter Wilbur again took the matter up with plaintiff, and as a result of several efforts added to the draft at the end and as a part of the last clause of the contract the words u and if the said furnaces or either of them shall be operated by other parties than the Buffalo Furnace Company, said parties so operating shall have the benefit of the switching rates named herein during the term of this agreement.’.’ This addition was manifestly intended to covef two furnaces operated on the premises even though one or both should not be operated by the Buffalo Furnace Company, or its assigns; and-, standing by itself, it would mean that, and would in that- regard conform to the verbal contract made between plaintiff and Thomas, when the terms of the right of way agreement and the switching contract were originally agreed upon by them. Plaintiff, as he testifies, took this contract with the added clause to Merrill,, explained to him its purpose, and said that Wilbur was willing that the switching contract be made in form with the Buffalo Furnace Company, provided the contract also made it clear that it carried out the .terms of the original agreement actually made, and also made it clear that the agreement was for the property of the Union Iron Company on its lands no matter by whom built or operated; and that Wilbur had added the clause above quoted that would cover the point, and if Merrill would not include that the deal was off. Merrill replied: “That is what you have been asking all the túne and just what I would not give you.” Plaintiff rejoined: “Well, it is just what Thomas agreed and it is just what we got, or were to get when we turned over that right of way contract that you have gone and recorded; and you have been trying to hold me up, first leaving out one railroad and then another and then two railroads.” He added that the contract must include this clause, or the railroad would have to condemn its right of way through the property. Merrill’s reply was: “Well, well, well, don’t get excited about that; I will do it; I will do it. That is giving you what you ask for; I hope to thunder you are satisfied now. This has bothered me more than anything since I have been connected with the road. * * * Baird, you are the greatest fellow to hang onto a thing that I ever saw. If I had been making that contract I would never have made it in the world; I don’t believe in these long term switching contracts. I don’t see what those fellows were thinking of, but you have got what you want. I hope you are satisfied. ” Plaintiff then in effect said to him that it was simply carrying out the contract made with Thomas; that Wilbur had insisted in the early negotiations on three furnaces and a steel plant, had reduced the demand to two .furnaces, and as the railroad had drafted the contract, without the clause added by Wilbur, the new or proposed furnace would be cut out, and that this added clause was Wilbur’s ultimatum, and he would agree to nothing else. The agreement which included this clause was then executed. There can be no question, if this actually occurred and the clause was added under the agreement and understanding of both parties, that it was for the purpose of effectuating the actual agreement they had made, that the contract was to be for the benefit of the premises, and, for the interests of the Union Iron Company, that the switching contract was to be . for two furnaces by whomsoever built and operated, there was a mutual mistake of the parties because the clause did not in fact add this vital part of the actual agreement. Standing alone it was adequate for the purpose, and clearly expresses the idea intended. But as this court has held, when a case at law involving the right to recover these same rebates under this same contract was before it, the clause read in connection with the. earlier part of the agreement, which runs to the Buffalo Furnace Company for two furnaces . operated by it on 'the premises, limits the effect of the clause to such furnaces as the Buffalo Furnace Company ór its successors or assigns should operate there.

(Thompson v. Erie R. R. Co., 96 App. Div. 539.) This, of course, emasculates the clause, leaving it utterly worthless in accomplishing the purpose for which plaintiff and Wilbur insisted on its addition to the contract* and which' Merrill at the time it was added understood it did effectuate. We have, therefore, a clear and definite agreement between the parties, which by inadvertence or mistake has not been written into the actual contract as signed. It is clear that the parties intended to include it in the written agreement and supposed they had done so by adding the clause referred to. In this they were both mistaken. This action is in. the first instance to correct this mistake. That it is a mistake that equity has full power to correct is certain. The principle here controlling is well stated in Pomeroy’s Equity Jurisprudence (3d ed. § 8-1-5) as follows: “If on the other hand, after making an agreement, in the process of reducing it to a written form the instrument, by means of a mistake of law, fails to express the contract which the parties actually entered into, equity will interfere either by way of defense to its enforcement, or by cancellation, or with the appropriate relief, by" reformation, to the same extent as if the failure of the writing to express the real contract was caused by a mistake of fact. In this instance there is no mistake as to the legal import of the contract actually made; but the mistake of law prevents, the real contract from being embodied' in the written instrument. In short, if a written instrument fails to express the intention which the parties had in making the contract which it purports to contain, equity will grant its relief, affirmative or defensive, although the failure may have resulted from a mistake as to the legal meaning and operation of the terms or language employed in the writing.” This statement of the law is forfcified by citations from the decisions of the courts of this and other States. (See, also, Curtis v. Albee, 167 N. Y. 360; Fulton v. Colwell, 112 Fed. Rep. 836.)

It is urged by appellant’s counsel that the contract, under which plaintiff claims, being in fact only in parol, the Statute of Frauds is a defense. The apparent answer to this is that the parties supposed the contract had been expressed in the written instrument, in which they were mistaken; and plaintiff now asks the court to declare the intention of the parties by correcting the written instrument, thus making it what they supposed it was. When the correction is made the contract will no longer rest in parol. (34 Cyc. 927.)

It is also claimed that because the written instrument in question is under seal and the Union Iron Company, one of plaintiff’s predecessors in interest, was not in fact named as a party to it, even if it had not assigned its interest therein, it . could not now claim -under the contract. But though not named in the contract, the actual agreement was that the Union Iron Company should have the benefit of the agreement as a covenant attached to and running with its land. To that extent the contract was made for its benefit. It also furnished the material consideration therefor as has already been pointed out, and under the doctrine of Lawrence v. Fox (20 N. Y. 268) and kindred cases it, or its assignee, is entitled to claim the benefits of the contract as made, which would include the right to have the written contract reformed. It is not stranger to the contract. Nor does the fact that the contract is under seal prevent the application of the rule. (Coster v. Mayor, 43 N. Y. 399, 411; Haack v. Weicken, 118 id. 67.)

Appellant’s counsel asserts that relief should be denied in this action, because, if granted, -it would in effect make defendant ahow rebates on freight charges, whereas both State and Federal law for years have made special rates or rebates -unlawful and forbidden their payment or allowance. The effect of the Federal statutes may properly be eliminated from consideration because there is no' proof that any of the shipments, overpayments for which are represented in the recovery, were interstate shipments. The Erie in switching to the different roads acted wholly within the State, and its whole connection with any of these shipments was apparently intrastate and not interstate. The State law referred to (Pub. Serv. Com. Law, Laws of 1907, chap. 439) was not passed until years after the right to recover the overcharges had matured and this action had actually been begun. It is further urged that the passage of these acts should be now accepted as indicating that a rebating contract was inherently wicked and, therefore, a court of equity should not lend its aid to support that unclean thing. That a court of equity seeks to ascertain and act upon, not conditions as they were at the beginning of a litigation, but as they actually are at the time of the trial, is doubtless true. But there was no condition, i. e., no statute nor any equitable principle, which when the contract- was violated by the Erie declared, or pointed to, the fact. that it was not legal. The contract when reformed is not a new contract, but is the actual contract made by the parties. The correction neeessa-. rily dates back to the time that the original contract was made. (34 Cyc. 999.) . This law was not intended, and probably could not in any event have been made, to have the retroactive effect of depriving plaintiff of his right of action already accrued to recover damages for the breach -of a contract legal at the time the breach occurred.

One of appellant’s chief contentions is that plaintiff has failed to produce that clear, convincing and satisfactory proof of mistake required in actions for reformation. .The claim in this regard is that it rests on the testimony of one witness and that witness the plaintiff. But, as we view the case, the plaintiff’s statements are amply supported by facts and circumstances about which there can be no dispute, some' of which have been already referred to. Plaintiff’s claim is based upon the fact that the contract was in fact principally made with and for the benefit of the Union Iron Company and not solely for the benefit of the Buffalo Furnace Company. This is both so natural and probable that in and of itself it is persuasive. The sole consideration for the switching contract was the right of way transfer. The large and valuable part of this consideration necessarily came from the owner of the premises, the Union Iron Company. Naturally, therefore, it would for its own material advantage seek to have the benefit of the contract apply to the two furnaces, which might be on the property, by whomsoever built or operated. It would also seem that practical construction has been given to the contract indicating that such was its intended effect. During the time these rates were refused to the Union Iron Works of Buffalo, which operated furnace B, defendant claimed that the contract did not apply to that furnace because it was not operated by the Buffalo Furnace Company, or its assigns. But as soon as this furnace together with the Buffalo Furnace plant and property were taken over by a new corporation called the Buffalo Union Furnace Company the contract rates were extended to this new company as to both furnaces and continued down to the time when it first made a claim that rebating had been prohibited by law. The new company took the Union Iron Works furnace in direct succession to its rights therein, not as assignee, or successor, of the Buffalo Furnace Company. If appellant’s present position is tenable, it is not apparent why these rates were extended to furnace B under its new management. It may also be observed that there is no direct denial of plaintiff’s testimony as to his conversations and negotiations with Thomas and Herrill. The latter when asked by defendant’s counsel in reference to the important and practically decisive conversation when it was agreed that Wilbur’s memorandum should be 'included in the contract whether such conversation took place, after testifying that he did not remember any such conversation at all, replies to the question “ Can you go any further than that?” “It may have been — it may have been, but he got that clause.” And this is the clause which, standing alone, would be. conclusive in favor of plaintiff’s claim.

The questions involved in this appeal have been thoroughly and ably discussed in the learned opinion delivered by Mr. Justice Marcus at Special Term (72 Misc. Rep. 162). The conclusions which the court has there stated, as will be seen on examination of the opinion, are well sustained both by reason and authority.

. The appeal from the order granting the additional allowance was not pressed on the argument. The order was properly granted.

The judgment and order should be affirmed, with costs.

All concurred, except McLennan, P. J., who dissented in a memorandum.

McLennan, P. J.

(dissenting):

The true interpretation and meaning of the contract in question, as written, was determined by this court (Thompson v. Erie R. R. Co., 96 App. Div. 539; opinion by Justice Hiscook, in which all but one of the justices concurred). It was held in that case, which was an action at law, that under the terms of such contract the plaintiff was not entitled to recover. This action is brought in equity, seeking a reformation of such contract so that its provisions shall inure to the benefit of the Union Iron Works, plaintiff’s assignor.

I think there is no evidence which',justifies the conclusion that the parties to the agreement did not know and fully understand its provisions; that there is no evidence upon which fraud can be predicated in the negotiation or execution of such contract. Neither is there any evidence .from which it can be said that there was mutual mistake in the execution of such contract by the parties. In other words, in my opinion the record is entirely barren of facts which would justify.a court of equity in reforming or changing the contract as it was made and executed by the respective parties.

I, therefore, conclude that the judgment should be reversed and a new trial granted, with costs to the appellant to abide event.

Judgment and order affirmed, with costs.  