The City of Portland, in Oregon, proposing to receive bids for
the construction of what was called the Bull Run pipeline, Hoffman
of Portland and McMullen of San Francisco entered into a contract
in writing as follows:
"This agreement, made and entered into by and between Lee
Hoffman, of Portland, Oregon, doing business under the name of
Hoffman & Bates, party of the first part, and John McMullen, of
San Francisco, California, party of the second part, witnesseth:
That, whereas, said Hoffman and Bates have with the assistance of
said McMullen at a recent bidding on the work of manufacturing and
laying steel pipe from Mount Tabor to the head works of the Bull
Run water system for Portland, submitted the lowest bid for said
work, and expect to enter into a contract with the water committee
of the City of Portland for doing such work, the contract having
been awarded to said Hoffman and Bates on said bid, it is now
hereby agreed that said Hoffman and said McMullen shall and will
share in said contract equally, each to furnish and pay one-half of
the expenses of executing the same and each to receive one-half of
the profits or bear and pay one-half of the losses which shall
result therefrom. And it is further hereby agreed that, if either
of the parties hereto shall get a contract for doing or to do any
other part of the work let or to be let by said committee for
bringing Bull Run water to Portland, the profits and losses thereof
shall in the same manner be shared and borne by said parties
equally, share and share alike."
Both put in bids for the work which forms the subject of dispute
in this case. Hoffman's bid was for $465,722. McMullen's was
$514,664. There were several other bids, but Hoffman's was the
lowest of all. The contract was awarded to him. He did the work and
received the pay. This
Page 174 U. S. 640
action was brought by McMullen to recover his portion of the
profit according to the contract.
Held that this contract
was illegal, not only as tending to lessen competition, but also
because the parties had committed a fraud in combining their
interests and concealing the same, and in submitting the different
bids as if they were
bona fide, and that the court will
not lend its assistance in any way towards carrying out the terms
of an illegal contract, nor will it or any court enforce any
alleged rights directly springing from such a contract.
While distinguishing
Brooks v.
Martin, 2 Wall. 70, from this case, the Court holds
that, taking that case into due consideration, it will not extend
its authority at all beyond the facts therein stated.
This action was originally brought by the complainant, McMullen,
against one Lee Hoffman, and, he having died before the trial, the
action was revived against the defendant, Julia E. Hoffman, as the
executrix of his will. When the defendant is hereinafter spoken of,
the original defendant is intended.
The complainant filed his bill against the defendant seeking an
accounting of profits that he alleged had been made by the
defendant upon a certain contract for the construction of what is
termed the "Bull Run Pipe Line," and which contract was entered
into between the City of Portland, in the State of Oregon, and the
defendant on or about March 10, 1893. The complainant bases his
right to share in the profits of that contract by virtue of another
contract in writing between himself and the defendant herein,
executed March 6, 1893. That agreement reads as follows:
"This agreement, made and entered into by and between Lee
Hoffman, of Portland, Oregon, doing business under the name of
Hoffman & Bates, party of the first part, and John McMullen, of
San Francisco, California, party of the second part, witnesseth
that whereas said Hoffman and Bates have, with the assistance of
said McMullen at a recent bidding on the work of manufacturing and
laying steel pipe from Mount Tabor to the headworks of the Bull Run
water system for Portland, submitted the lowest bid for said work,
and expect to enter into a contract with the water committee of the
City of Portland for doing such work, the contract having been
awarded to said Hoffman and Bates on said bid. "
Page 174 U. S. 641
"It is now hereby agreed that said Hoffman and said McMullen
shall and will share in said contract equally, each to furnish and
pay one-half of the expenses of executing the same and each to
receive one-half of the profits or bear and pay one-half of the
losses which shall result therefrom."
"And it is further hereby agreed that if either of the parties
hereto shall get a contract for doing or to do any other part of
the work let or to be let by said committee for bringing Bull Run
water to Portland, the profits and losses thereof shall in the same
manner be shared and borne by said parties equally, share and share
alike."
"Witness our hands and seals this 6th day of March, A.D.
1893."
"John McMullen [Seal]"
"Lee Hoffman [Seal]"
The contract for manufacturing and laying the steel pipe was
awarded to the defendant at a public letting of the whole work at
Portland, of which the manufacturing and laying of the pipe was a
part, and the whole work was divided into classes, and separate
bids called for and received for each class.
The defendant put in bids in the name of Hoffman & Bates for
several classes, while the plaintiff, in the name of the San
Francisco Bridge Company, of which he was an officer, put in
separate bids for the same classes.
The bids of complainant and defendant for the several classes of
the work were as follows:
Conduit from head works to Mt. Tabor of wrought iron or steel,
making and laying pipe:
Hoffman & Bates . . . . . . . . . . . . . . .
$465,722.00
San Francisco Bridge Company. . . . . . . . . 514,664.00
(The profits arising out of this contract are the subject of the
controversy herein.)
Head Works:
Hoffman & Bates . . . . . . . . . . . . . . . $
17,800.00
San Francisco Bridge Company. . . . . . . . . 16,550.00
Page 174 U. S. 642
Bridges:
Hoffman & Bates . . . . . . . . . . . . . . . $
33,562.94
San Francisco Bridge Company. . . . . . . . . 31,279.07
Also for steel conduit for headworks to Mt. Tabor:
Hoffman & Bates . . . . . . . . . . . . . . .
$359,278.00
San Francisco Bridge Company. . . . . . . . . 348,781.00
There were several other bids by different bidders for these
various classes. The bid in the name of Hoffman & Bates for the
manufacture and laying of the wrought iron or steel pipe from the
head works to Mt. Tabor, being $465,722, was the lowest out of
eight bids; the various bids from the highest to the lowest being
as follows:
The Risdon Iron & Locomotive Works. . . . . .
$600,737.00
The Bullon Bridge Company . . . . . . . . . . 533,507.00
Oscar Huber . . . . . . . . . . . . . . . . . 521,775.40
San Francisco Bridge Company. . . . . . . . . 514,664.00
Wolff, Buener & Zwicker . . . . . . . . . . . 495,682.00
Ferry Hinckle & Robert Wakefield. . . . . . . 481,040.00
E. W. Jones & O. W. Wagner. . . . . . . . . . 477,552.00
Hoffman & Bates . . . . . . . . . . . . . . . 465,667.00
All these bids were before the committee on the part of the
city, and were taken into consideration at the time the award was
made to the defendant. After the acceptance of his bid for the
manufacturing and laying of the pipe, the defendant entered into a
contract with the City of Portland to do the work mentioned in such
bid, and commenced the performance of the contract as provided for
therein. The work was duly completed, and the city paid defendant
the contract price for the same; retaining the percentage provided
for therein as security that the terms of the contract had been
fully complied with.
The complainant alleges that defendant, after securing the
contract, went on with the work thereunder, but refused to permit
him to participate in the profits arising therefrom or to examine
the books of the partnership, and that, although he (complainant)
furnished some of the capital and performed
Page 174 U. S. 643
some of the services provided for in the contract with the city,
and participated in some of the expenses of the execution of the
contract, and devoted some of his time and attention to the proper
performance thereof, and was at all times ready to do everything
required of him by his agreement of partnership, yet that the
defendant received all the moneys paid by the city and absolutely
refused to account to him for any part thereof, and denied that he
had any interest in or right to any portion of such moneys. The
complainant therefore asked for an accounting between himself and
defendant, as partners, and for a decree for the payment to him of
one-half the profits arising from the contract, the whole of which
he alleged amounted to $80,000 (the courts below say the evidence
shows they were $140,000); that a receiver might be appointed to
take charge of the property of the partnership, its records, books,
papers, etc., and that the defendant might be restrained during the
pendency of the suit from making sale or other disposition of the
tools, equipment, or other personal property belonging to the
partnership, and from drawing from the City of Portland the moneys
withheld by it on account of the contract, as well as any other
money due for other work done by the defendant under the contract
of partnership.
The answer of the defendant, while denying many of the
allegations of the complaint, set up as a special defense the
making of an agreement between the parties (of which the
partnership agreement was a portion), by the terms of which they
were to put in bids for the construction of the work, the
complainant in the name of the San Francisco Bridge Company and the
defendant in the name of Hoffman & Bates; that the bids should
not be in reality competitive, but should be submitted to each
other before they were put in, and their terms should be mutually
agreed upon, the higher bids to be merely formal, and the bids
themselves, as agreed upon, should be delivered to the water
committee; that, if either party received the contract, they should
both share in the profit or loss resulting from its performance,
but that their mutual interest in each other's bids should not be
made known when the bids were offered, so that it would appear that
they were apparently
Page 174 U. S. 644
competing for the various classes of the work and for furnishing
the material, when in fact they were not. This agreement, the
defendant alleged, was carried out, and the contract secured by
means thereof.
The court, upon motion of the complainant, granted a temporary
injunction as prayed for in the bill. Exceptions were taken to
certain parts of the answer of the defendant as being insufficient.
Material portions of these exceptions were overruled by the court
upon the ground that the answer set up an illegal contract between
the parties, and one which could not be enforced by either. 69 F.
509.
Upon the final hearing of the case, the same judge, becoming
convinced that he had erred in his former decision in overruling
the exceptions to the answer, decided that the case, as made on the
part of the defendant, showed no defense to the complainant's cause
of action, and thereupon he made a decree for an accounting,
substantially as asked for in the complainant's bill. 75 F.
547.
An appeal from the decree of the circuit court was taken to the
United States Circuit Court of Appeals for the Ninth circuit, and
that court held that the contract between the parties was illegal,
and that no action could be maintained thereon by either, and the
decree in favor of the complainant was therefore reversed. 83 F.
372. Complainant then applied to this Court for a writ of
certiorari to review the judgment of the circuit court of appeals,
which was granted May 9, 1898. 170 U.S. 705.
MR. JUSTICE PECKHAM, after stating the facts, delivered the
opinion of the Court.
The foregoing statement shows that there is a difference of
opinion in the courts below as to the law applicable to the
Page 174 U. S. 645
case. The question is one of importance, involving as it does
the principles which should control in regard to the procurement of
contracts at public lettings for work to be awarded to the lowest
bidder. Assuming the same facts, the courts below have come to
opposite conclusions upon the character of the contract, and upon
the right of the complainant to obtain redress for his alleged
wrongs.
It was on account of the general importance of the question, and
the many lettings for public works by the government and by
municipal corporations which are affected by the law relative to
bidding, that this Court thought it a proper case to issue the writ
of certiorari herein. The cases upon the subject are not entirely
harmonious, and we think it well to again consider some of them,
and, so far as possible, to remove the doubts which seemingly have
arisen in this branch of the law.
Looking in the record before us, we find that the pleadings and
proofs taken herein show that, for some time prior to the 6th of
March, 1893, the City of Portland intended to add to its water
supply by bringing to the city the water from a creek or river
called "Bull Run," some thirty miles distant, and for that purpose
it had issued, through its water committee, proposals for bids to
build the works, which proposals were divided into several
different classes, as already stated.
The complainant, McMullen, living in San Francisco, and being a
large stockholder in, and manager of, the San Francisco Bridge
Company, came to Portland for the purpose of giving his attention
to the matter and, if possible, to make an arrangement with the
defendant by which they might together become bidders for the work.
He and the defendant had many interviews before the time of
delivering the bids arrived, and they finally agreed that each
party should put in separate bids in his own or his firm name, or
in the name of his company, for certain classes of the work, but
that they both should have a common interest in each bid if any was
accepted. This community of interest was to be kept secret and
concealed from all persons, including the water committee. Each was
to know the amount of the other's bid, and
Page 174 U. S. 646
all bids were to be put in only after mutual consultation and
agreement. Bids for the various classes of work were put in as
above set forth, and among them the bid for the manufacture and
laying of the pipe which was accepted by the water committee. All
of them were put in pursuant to this agreement, part of them in the
name of Hoffman & Bates, and part in the name of the San
Francisco Bridge Company. The bid in the name of the San Francisco
Bridge Company for the manufacture of the pipe was nearly $50,000
higher than the amount bid in the name of Hoffman & Bates, and
was put in after consultation with, and approval by, the defendant.
This last bid was put in, as stated by Mr. McMullen in his
evidence, as a matter of form only, and to keep the name of his
company before the public, but it appeared on its face to be a
bona fide bid. The water committee received the bids in
ignorance of the existence of this agreement and in the supposition
that all the bids which were received were made in good faith, and
they all received consideration at the hands of the committee.
After the computations were made, by which it appeared that the bid
of the defendant was the lowest for the manufacture and laying of
the pipe, the contract was awarded him, and afterwards that portion
of the agreement which had been made between the parties to this
combination,
viz., that relating to the partnership, was
reduced to writing, and is set out in the foregoing statement.
Upon these facts, the question arising is whether a contract
between the parties themselves such as is above set forth is
illegal. In order to answer the question, we would first naturally
ask what is its direct and necessary tendency? Most clearly that it
tends to induce the belief that there is really competition between
the parties making the different bids, although the truth is that
there is no such competition, and that they are in fact united in
interest. It would also tend to the belief on the part of the
committee receiving the bids that a
bona fide bidder,
seeking to obtain the contract, regarded the price he named,
although much higher than the lowest bid, as a fair one for the
purpose of enabling him to realize reasonable profits from its
performance. A bid thus made
Page 174 U. S. 647
amounts to a representation that the sum bid is not, in truth,
an unreasonable or too great a sum for the work to be done. We do
not mean it is a warranty to that effect, or anything of the kind,
but simply that a committee receiving such a bid, and assuming it
to be a
bona fide bid, would naturally regard it as a
representation that the work to be done, with a fair profit, would,
in the opinion of the bidder, cost the amount bid. Hence it would
almost certainly tend to the belief that the lower bid was not an
unreasonably high one, and that it would be unnecessary and
improper to reject all the bids and advertise for a new letting.
The fact that there were other bids even higher than that of the
San Francisco Bridge Company for the manufacture and laying of the
pipes does not alter the tendency of the agreement, when carried
into effect, to create or to strengthen the belief on the part of
the committee in the fact of an active competition and the
bona
fide character of that competition, and that the lowest bid
would be in all probability a reasonable one. It is in truth
utterly impossible to accurately or fully predict all the vicious
results to be apprehended as the natural effect of this kind of an
agreement. It cannot be said in all cases just what the actual
effect may have been.
The natural tendency and inherent character of the agreement are
also unaffected by any evidence produced on the part of the
complainant that the chairman of the water committee had, when
examined nearly three years after the occurrence, no recollection
as to the bid of the bridge company, or that it had any particular
effect upon his mind, and that he said that the contract was
awarded to the lowest bidder simply because he was the lowest
bidder, and without reference to the bid of the bridge company.
The question is not whether, in this particular case, any member
of the water committee did or did not remember the fact that the
bridge company had made a bid, or that such bid had no effect upon
his mind. The question is not as to the effect a particular act in
fact had upon a member of the water committee, but what is the
tendency and character of the agreement made between the parties,
and that tendency
Page 174 U. S. 648
or character is not altered by proof on the part of a member of
the committee, given several years afterwards, that he had no
special recollection that such a bid had been made. The evidence is
that all the bids that were given received the consideration of the
committee, and there can be no doubt that the more bids there were
seemingly of a
bona fide character, the more the committee
would be impressed with the idea that there was active competition
for the work to be done.
It might readily be surmised that if these parties had bid in
competition, one or both of the bids would have been lower than
their combined bid. It was not necessary, however, to prove so
difficult a fact. The inference would be natural.
In
Richardson v. Crandall, 48 N.Y. 348, 362, the court
said:
"In all cases where contracts are claimed to be void as against
public policy, it matters not that any particular contract is free
from any taint of actual fraud, oppression, or corruption. The law
looks to the general tendency of such contracts. The vice is in the
very nature of the contract, and it is condemned as belonging to a
class which the law will not tolerate,"
citing
Atcheson v. Mallon, 43 N.Y. 147.
Although these remarks were made when the court was dealing with
the case of a bond taken
colore officii, yet the principle
applies equally to a case like the one at bar, and indeed it is
seen that such was the view of the judge delivering the opinion,
since he cited
Atcheson v. Mallon, which, in its nature,
is a case very similar to the one now before us.
The vice is inherent in contracts of this kind, and its
existence does not in the least depend upon the success which
attends the execution of any particular agreement.
In
Tool Company v.
Morris, 2 Wall. 45,
69
U. S. 56, the Court said, in speaking as to illegal
agreements:
"It is sufficient to observe generally that all agreements for
pecuniary considerations to control the business operations of the
government, or the regular administration of justice, or the
appointments to public offices, or the ordinary course of
legislation are void as against public policy, without reference to
the question whether improper means are contemplated or used in
their execution. "
Page 174 U. S. 649
And in
Rex v. De Beringer, 3 M. & S. 67, 72, cited
in
Scott v. Brown (1892), 2 Q.B.D. 724, 730, Lord
Ellenborough, C.J., said:
"A public mischief is stated as the object of this conspiracy;
the conspiracy is by false rumors to raise the price of the public
funds and securities, and the crime lies in the act of conspiracy
and combination to effect that purpose, and would have been
complete, although it had not been pursued to its consequences, or
the parties had not been able to carry it into effect. The purpose
itself is mischievous. It strikes at the price of a vendible
commodity in the market, and, if it gives it a fictitious price by
means of false rumors, it is a fraud leveled against all the
public, for it is against all such as may possibly have anything to
do with the funds on that particular day."
Contracts of the nature of this one are illegal in their nature
and tendency, and for that reason no inquiry is necessary as to the
particular effect of any one contract, because it would not alter
the general nature of contracts of this description, or the force
of the public policy which condemns them.
In the case at bar, the illegal character of the agreement is
founded, not alone upon the fact that it tends to lessen
competition, but also upon the fact of the commission of a fraud by
the parties in combining their interests and concealing the same,
and in submitting different bids as if they were
bona fide
when they knew that one of them was so much higher than the other
that it could not be honestly accepted, and when they put it in for
the sake of keeping up the form and of strengthening the idea of a
competition which did not in fact exist. The tendency of such
agreements is bad, although in some particular case it might be
difficult to show that it actually accomplished a fraud, while its
intention to do so would be plain enough. Therefore, when it is
urged that these parties had no intention of bidding for this work
alone, and that, unless they had combined their bids, neither would
have bid at all, and hence the agreement between them tended to
strengthen, instead of to suppress, competition, this answer to
Page 174 U. S. 650
the illegality of the transaction is insufficient. The evidence,
however, does not show that if these parties had not agreed upon a
combination, neither would have bid alone. It shows complainant
came to Portland to see the defendant, and to conclude their
arrangements to go into the combination, but we are by no means of
the opinion that the evidence shows that if they had not combined,
they would not have bid at all. Complainant's company had bid alone
at a prior letting some time before, and had then been the lowest
bidder for the contract, which the city did not award because of a
lack of means of payment for the work consequent upon a veto by the
governor of the bill providing for the issuing of bonds to make
such payment. And it seems that the defendant himself was well able
to carry on the contract alone.
If it be granted that the fact was proved that neither party
would have bid separately, and that, by virtue of the combination,
a bid was made which otherwise would not have been offered, the
significance of the other facts in the case is not thereby altered.
Those other facts are the concealment of the interest which the
parties had in each other's bids and the making of what were, under
the circumstances, nothing more than fictitious bids for this and
the other classes of work for which both parties put in bids,
evidently for no other purpose than to endeavor thereby to deceive
the committee into believing that there was real competition
between them when in fact there was none. If there had been
competition, the bid of each for the contract that was obtained
might very likely have been lower than the one that was accepted.
It is not necessary to prove that fact in order to show the
nefarious character of the agreement.
The reason given for the making of these fictitious bids by the
complainant -- that it was a formal matter, and to keep the name of
his company before the public -- is entirely inadequate. The bids
actually put in by them for the other classes of work had the same
tendency to strengthen belief in the reality of the competition
which in fact did not exist between these persons. The whole
transaction was intentionally presented to the water committee in a
false and deceptive light.
Page 174 U. S. 651
Upon general principles, it must be apparent that biddings for
contracts for public works cannot be surrounded with too many
precautions for the purpose of obtaining perfectly fair and
bona fide bids. Such precautions are absolutely necessary
in order to prevent the successful perpetration of fraud in the way
of combinations among those who are ostensible rivals, but who in
truth are secretly banded together for the purpose of obtaining
contracts from public bodies, such as municipal and other
corporations, at a higher figure than they otherwise would. Just
how the fraud is to be successfully worked out by the combination
it is not necessary to show. It is enough to see what the natural
tendency is. Public policy requires that officers of such
corporations, acting in the interest of others, and not using the
sharp eye of a practical man engaged in the conduct of his own
business, and not controlled by the powerful motive of
self-interest, should, so far as possible, and for the sake of the
public whom they represent, be protected from the dangers arising
out of a concealed combination and from fictitious bids.
To hold contracts like the one involved in this case illegal is
not to create any new rule of law for the purpose of affording the
protection spoken of. It is but enforcing an old rule, and applying
it to such facts as exist in this case because it naturally fits
them. Its enforcement here is to but carry into effect the public
policy upon which the rule itself is founded. People who have been
guilty of the conduct exhibited in this record cannot be heard to
say that, although their arrangement was fraudulent and illegal,
they would nevertheless have obtained the contract, even if they
had not been guilty of the fraud, because the bids show they were
the lowest bidders. The bids might have been lower yet if there had
been competition where there was in fact combination. The parties
must accept the consequences resulting from entering into the
agreement proved in this case, all of which they carried out, and
included in which, and as a consequence thereof, was the agreement
with the city, and the written agreement of partnership between
themselves.
In
Hyer v. Richmond Traction Company, 168 U.
S. 471, in
Page 174 U. S. 652
speaking as to the character of the agreement in that case, MR.
JUSTICE BREWER remarked that the vice of a combination
"lies in the fact of secrecy, concealment, and deception. The
one applicant, though apparently antagonizing the other, is really
supporting the latter's application, and the public authorities are
misled by statements and representations coming from a supposed
adverse, but in fact friendly, source."
In that case, the demurrer admitted the allegation of the
complaint that the combination of the two interests asking for the
concession from the common council was known and announced to that
body before its decision was made. The case simply shows the part
which concealment takes in a combination, being in fact one of the
great dangers springing therefrom.
In
Atcheson v. Mallon, 43 N.Y. 147, 151, Judge Folger,
in delivering the opinion of the court, said:
"But a joint proposal, the result of honest cooperation, though
it might prevent the rivalry of the parties and thus lessen
competition, is not an act forbidden by public policy. Joint
adventures are allowed. They are public and avowed, and not secret.
The risk, as well as the profit, is joint, and openly assumed. The
public may obtain at least the benefit of the joint responsibility,
and of the joint ability to do the service. The public agents know
then all that there is in the transaction, and can more justly
estimate the motives of the bidders, and weigh the merits of the
bid."
We have here nothing to do with a combination of interest which
is open and avowed, which appears upon the face of the bid, and
which is therefore known to all. Such a combination is frequently
proper, if not essential, and where no concealment is practiced and
the fact is known, there may be no ground whatever for judging it
to be in any manner improper.
But in this case there is more even than concealment. There is
the active fraud in the putting in of these, in substance,
fictitious bids, in their different names, but in truth forming no
competitive bids, and put in for the purpose already stated. It is
not too much to say that the most perfect
Page 174 U. S. 653
good faith is called for on the part of bidders at these public
lettings so far as concerns their position relating to the bids put
in by them or in their interest. The making of fictitious bids
under the circumstances detailed herein is, in its essence, an
illegal and most improper act. Indeed, it is a plain fraud,
perpetrated in the effort to obtain the desired result.
The evidence shows that this written partnership agreement was
only a part of the entire agreement existing between the parties.
That agreement covered, and was clearly intended to cover, their
whole action from the time they agreed to put in their bids in a
common interest up to and including the execution and performance
of the contract obtained from the city. The agreement (of which
that for a partnership was but a portion) was that they should
combine their interests; that they should put in bids known to
each; that they should conceal the fact of their combination; that
they should put in fictitious bids without expectation or purpose
of having them taken; that, if the contract were procured, they
should perform the work as partners and share expenses and divide
profits. No division of that contract into two periods, the one
prior and the other subsequent to the written agreement between the
parties, can be made. The complainant cannot count only upon the
contract of partnership as evidenced by the writing of March, 1893.
That writing evidenced only a portion of the agreement that had
been made between these parties, the result being that, although
their agreement was in the first instance by parol, a portion of it
was subsequently reduced to writing.
The whole contract is nonetheless one and indivisible, just as
much as if it had all been put in writing. If it had been, it would
scarcely be argued that complainant might maintain an action by
relying on that part of it which was valid and relating to the
partnership between them, and that he might discard or omit to
prove that portion which was illegal. If the complainant did not,
the defendant could, prove the whole contract -- as well the part
lying in parol as that which was reduced to writing -- so that the
court might, upon an inspection of the whole contract, determine
therefrom its character. The unity of the
Page 174 U. S. 654
contract is not severed, or its meaning or effect in any degree
altered, by putting part of it in writing and leaving the rest in
parol.
Concluding as we do that this agreement between these parties
is, as a whole, of an illegal nature, and that the portion thereof
which is reduced to writing cannot be separated from the balance of
the agreement, the question then arises as to the result of such
conclusion upon the parties to the agreement.
There are several old and very familiar maxims of the common law
which formulate the result of that law in regard to illegal
contracts. They are cited in all law books upon the subject, and
are known to all of us. They mean substantially the same thing, and
are founded upon the same principles and reasoning. They are:
"
Ex dolo malo non oritur actio;" "Ex pacto illicito non oritur
actio;" "Ex turpi causa non oritur actio." About the earliest
illustration of this doctrine is almost traditional, in the famous
case of
The Highwayman. It is stated that Lord Kenyon once
said, by way of illustration, that he would not sit to take an
account between two robbers on Hounslow Heath, and it was
questioned whether the legend in regard to the highwayman did not
arise from that saying. It seems, however, that the case was a real
one. He did file a bill in equity for an accounting against his
partner, although it was no sooner filed, and its real nature
discovered, than it was dismissed, with costs, and the solicitors
for the plaintiff were summarily dealt with by the court as for a
contempt in bringing such a case before it. (1 Lindley on
Partnership, 5th ed. 94, note
n; 9 Law Quarterly Review
(London), pp. 105, 197.)
The authorities from the earliest time to the present
unanimously hold that no court will lend its assistance in any way
towards carrying out the terms of an illegal contract. In case any
action is brought in which it is necessary to prove the illegal
contract in order to maintain the action, courts will not enforce
it, nor will they enforce any alleged rights directly springing
from such contract. In cases of this kind, the maxim is "
Potior
est conditio defendentis."
Page 174 U. S. 655
The following are only a few of the numerous cases upon the
subject in England and in this country:
Holman v. Johnson
(1775), 1 Cowper 341;
Booth v. Hodgson (1795), 6 T.R. 405;
Thomson v. Thomson (1802), 7 Ves. 468;
Shiffner v.
Gordon (1810), 12 East. 294;
Sykes v. Beadon (1879),
11 Ch.Div. 170;
Scott v. Brown (1892), 2 Q.B.D. 724;
Belding v. Pitkins (1804), 2 Caines 147
a; Atcheson v.
Mallon (1870), 43 N.Y. 147;
Leonard v. Poole (1889),
114 N.Y. 371;
Wheeler v. Russell (1821) 17 Mass. 258, 281;
Snell v. Dwight (1876), 120 Mass. 9;
Marshall
v. Baltimore & Ohio Railroad Co. (1853), 16
How. 314,
57 U. S. 334;
McBlair v.
Gibbes (1854), 17 How. 232;
Coppell v.
Hall (1868), 7 Wall. 542;
Trist v.
Child (1874), 21 Wall. 441,
88 U. S. 448;
Woodstock Iron Company v. Richmond & Danville Extension
Co. (1889),
129 U. S. 643; 1
Lindley on Partnership, 5th ed. 93, note, giving the result of the
American cases.
The general proposition is not disputed, but certain
explanations as to its meaning and extent have been announced by
the courts in cases now to be referred to, and the effort has been
to show that the case before us comes under some of the exceptions
to the rule, and ought not to be governed by the so-called
harshness of the rule itself.
If the partnership agreement that is contained in the writing
above set forth is in truth but part of an entire agreement, which
contains utterly illegal provisions, then this action cannot be
maintained, within any of the authorities.
It is only by proving the partnership agreement as an entire
agreement, separate and free from the balance of the agreement
between the parties, that argument can be made in favor of its
validity. It has been sometimes said that where a contract,
although it be illegal, has been fully executed between the
parties, so that nothing remains thereof for completion, if the
plaintiff can recover from the defendant moneys received by him
without resorting to the contract the court will permit a recovery
in such case. The cases cited as illustrating the exception are,
among others,
Tenant v. Elliott (1797), 1 Bos. & Pul.
2;
Farmer v. Russell (1798), 1 Bos. & Pul. 295;
Sharp v. Taylor (1849), 2 Phil.Ch. 801, 817;
Page 174 U. S. 656
Armstrong v.
Toler (1826), 11 Wheat. 258,
24 U. S. 269;
McBlair v.
Gibbes, 17 How. 232,
58 U. S. 235;
Brooks v.
Martin (1863), 2 Wall. 70;
Planters'
Bank v. Union Bank (1872), 16 Wall. 483;
Armstrong v. American Exchange National Bank of Chicago
(1890),
133 U. S. 433,
133 U. S.
466.
Upon the point as to the ability of the plaintiff to make out
his cause of action without referring to the illegal contract, it
may be stated that the plaintiff, for such purpose, cannot refer to
one portion only of the contract upon which he proposes to found
his right of action, but that the whole of the contract must come
in, although the portion upon which he founds his cause of action
may be legal.
Booth v. Hodgson, 6 T.R. 405, 408;
Thomson v. Thomson, 7 Ves. 468;
Embrey v.
Jemison, 131 U. S. 336,
131 U. S.
348.
In the first of the above cases the plaintiff sought to maintain
his action by referring to that part of the contract which was not
illegal, and to ask a recovery upon that alone. Lord Kenyon, Chief
Justice, observed that it seemed to be admitted by counsel for
plaintiff
"that, if the whole case were disclosed to the court, there was
no foundation for the demand. They say to the court,"
"Suffer us to garble the case, to suppress such parts of the
transaction as we please, and to impose that mutilated State of it
on the court as the true and genuine transaction, and then we can
disclose such a case as will enable our clients to recover in a
court of law."
"Such is the substance of this day's argument. It is a maxim in
our law that a plaintiff must show that he stands on a fair ground
when he calls on a court of justice to administer relief to
him."
Mr. Justice Ashhurst, in the same case, said:
"The plaintiffs wish us to decide this case on a partial
statement of the facts, thereby admitting that, if the whole case
be disclosed, they have no prospect of success; but we must take
the whole case together, and upon that the plaintiffs cannot
recover."
Mr. Justice Grose said:
"We cannot decide on a part of the case, and taking the whole
together, an assumpsit cannot be raised from one part of the case
when the other parts
Page 174 U. S. 657
of it negative an assumpsit."
The defendant therefore had judgment.
In
Thomson v. Thomson, supra, the plaintiff was not
permitted to recover, because he had no claim to the money except
through the medium of an illegal agreement. The Master of the Rolls
(Sir William Grant) said:
"If the case could have been brought to this, that the company
had paid this into the hands of a third person for the use of the
plaintiff, he might have recovered from that third person, who
could not have set up this objection [the illegality of the
contract] as a reason for not performing his trust.
Tenant v.
Elliott is, I think, an authority for that. But in this
instance, it is paid to the party, for there can be no difference
as to the payment to his agent. Then how are you to get at it,
except through this agreement? There is nothing collateral, in
respect of which, the agreement being out of the question, a
collateral demand arises, as in the case of stock-jobbing
differences. Here you cannot stir a step but through that illegal
agreement, and it is impossible for the court to enforce it. I must
therefore dismiss the bill."
And in
Embrey v. Jemison, supra, although the action
was upon four negotiable notes, the Court would not permit a
recovery to be had upon them, because the consideration for the
notes was based upon a contract which was illegal. MR. JUSTICE
HARLAN, in delivering the opinion of the Court, said that the
plaintiff could not
"be permitted to withdraw attention from this feature of the
transaction by the device of obtaining notes for the amount claimed
under that illegal agreement, for they are not founded on any new
or independent consideration, but are only written promises to pay
that which the obligor had verbally agreed to pay. They do not in
any just sense constitute a distinct or collateral contract based
upon a valid consideration. Nor do they represent anything of
value, in the hands of the defendant, which in good conscience
belongs to the plaintiff or to his firm. Although the burden of
proof is on the obligor to show the real consideration, the
execution of the notes could not obliterate the substantive fact
that they grew immediately out of, and are directly connected
Page 174 U. S. 658
with, a wagering contract. They must therefore be regarded as
tainted with the illegality of that contract, the benefits of which
the plaintiff seeks to obtain by this suit. That the defendant
executed the notes with full knowledge of all the facts is of no
moment. The defense he makes is not allowed for his sake, but to
maintain the policy of the law,"
citing
Coppell v.
Hall, 7 Wall. 542,
74 U. S.
558.
In the latter case, Mr. Justice Swayne, delivering the opinion
of the Court, said:
"Whenever the illegality appears, whether the evidence comes
from one side or the other, the disclosure is fatal to the case. No
consent of the defendant can neutralize its effect. A stipulation
in the most solemn form to waive the objection would be tainted
with the vice of the original contract, and void for the same
reasons. Wherever the contamination reaches, it destroys. The
principle to be extracted from all the cases is that the law will
not lend its support to a claim founded upon its violation."
These authorities uphold the principle that the whole case may
be shown, and the plaintiff cannot prevent it by proving only so
much as might sustain his cause of action, and then objecting that
the defendant himself brings in the balance, which was not
necessary for plaintiff to prove.
The cases above cited as illustrative of the exceptions to the
general rule also show what is meant by the cause of action being
founded on some new consideration, or upon a contract collateral to
the original illegal one.
In
Tenant v. Elliott, supra, it was held that where two
persons had entered into an illegal contract in regard to
insurance, and, a loss having occurred, the insurer paid the money
to a third person, to be paid to plaintiff, the third person could
not himself retain the money because it arose out of an illegal
contract. Eyre, C.J., asked
"whether he who had received the money to another's use on an
illegal contract can be allowed to retain it, and that not even at
the desire of those who paid it to him."
In such case, clearly the defendant had nothing whatever to do
with the illegality of the original contract. He received
Page 174 U. S. 659
the money to be paid to another, and, when he received it for
that purpose, he promised, either expressly, or by implication
arising from the facts, that he would deliver the money to the
plaintiff; and, when he refused to do it, the plaintiff could
recover upon this express or implied contract without resorting in
any manner to the original contract between himself and another,
which in its nature was illegal, but with which the defendant was
in no wise concerned.
Farmer v. Russell, supra, is to the same effect. The
defendant received the money from a third person to deliver to the
plaintiff, and it was held that he was bound to pay it to the
plaintiff, although the original consideration upon which the money
was to be paid the plaintiff by the third person was illegal. Eyre,
Chief Justice, said:
"It seems to me that the plaintiff's demand arises simply out of
the circumstances of money being put into the defendant's hands to
be delivered to him. This creates an indebitatus, from which an
assumpsit in law arises, and on that action on the case may be
maintained. . . . The case therefore is brought to this: that the
money is got into the hands of a person who was not a party to the
contract, who has no pretense to retain it, and to whom the law
could not give it by rescinding the contract. Though the court will
not suffer a party to demand a sum of money in order to fulfill an
illegal contract, yet there is no reason why the money in this case
should not be recovered notwithstanding the original contract was
void. The difficulty with me is that the contract with the carrier
cannot be connected with the contract between the plaintiff and the
man at Portsmouth, and in that view I think the verdict is not to
be supported. However, I incline to a new trial on another ground:
it does not clearly appear that the defendant was not himself a
party to the original contract, for there was a circumstance in the
report which gave much countenance to the idea that the carrier
knew what he was doing,
viz., that he was lending his
assistance to an infamous traffic. In that case, the rule
'
Melior est conditio possidentis' will apply, for if the
contract with him be stained by anything illegal, the plaintiff
shall not be heard in a court of law. "
Page 174 U. S. 660
The verdict in this case had been for the defendant.
There was a question in the case whether the defendant was privy
to the contract between the plaintiff and the man at Portsmouth.
The goods transported were counterfeit pennies or half pence, and
it was the opinion of Eyre, Chief Justice, that, if the defendant
had been privy to the original illegal agreement so that the whole
thing was but one transaction, the plaintiff could not have
recovered. Mr. Justice Rooke was of opinion that it was not
important whether the defendant were privy or not; that if the
contract were illegal, the plaintiff could not recover from the
defendant in any event. The other two judges were of opinion that,
the money having been delivered to the defendant for the purpose of
being paid to the plaintiff, the defendant was bound to make such
payment, without reference to the illegality in the original
transaction.
The difference in the principle upon which a recovery was
allowed in these two cases and that upon which the defense in this
case is based is very clear. In the case before us, the cause of
action grows directly out of the illegal contract, and if the court
distributes the profits, it enforces the contract, which is
illegal. But where A claims money from B, although due upon an
illegal contract, and B acknowledges the obligation, and waives the
defense of illegality, and pays the money to a third party upon his
promise to pay it to A, the third party cannot successfully defend
an action brought by A to recover the money by alleging that the
original contract between A and B was illegal. This is the
principle decided, and we think correctly decided, in the cases
cited. It was certainly no business of the third party to inquire
into the reasons which impelled the person to give him the money to
pay to the plaintiff. That was a matter between those parties, and
if the party from whom the money was due admitted his indebtedness,
and chose to pay it, the defendant, who received it upon his
promise to pay the plaintiff, would have no possible defense to an
action by the plaintiff to compel such payment. Such an action is
in no sense founded upon an illegal contract. That matter was
closed when the party
Page 174 U. S. 661
owing the money under it paid it to a third person, to be paid
to the plaintiff. The action by the plaintiff in such case is
founded upon a new contract, upon a totally different
consideration, and of a perfectly legitimate character.
The next case cited by complainant as an authority for the
maintenance of this action is
Sharp v. Taylor, supra. It
was stated by the chancellor in that case that where one of two
partners had possessed himself of the property of the firm, he
could not be allowed to retain it by merely showing that, in
realizing it, some provision of some act of parliament had been
violated or neglected, or that some provision of a foreign statute
relating to the registry of vessels had not been complied with.
Lord Chancellor Cottenham, in the course of his opinion,
said:
"The violation of law suggested was not any fraud upon the
revenue, or omission to pay what might be due, but, at most, an
invasion of a parliamentary provision supposed to be beneficial to
the shipowners of this country -- an evil, if any, which must
remain the same whether the freight be divided between Sharp and
Taylor according to their shares, or remain altogether in the hands
of Taylor. As between these two, can this supposed evasion of the
law be set up as a defense by one against the otherwise clear title
of the other? In this particular suit, can the one tenant in common
dispute the title common to both? Can one of two partners possess
himself of the property of the firm, and be permitted to retain it,
if he can show that, in realizing it, some provision in some act of
parliament has been violated or neglected? Can one of two partners
in any import trade defeat the other by showing that there was some
irregularity in passing the goods through the custom house? The
answer to this, as to the former case, will be that the transaction
alleged to be illegal is completed and closed, and will not be in
any manner affected by what the court is asked to do as between the
parties. Do the authorities negative this view of the case? The
difference between enforcing illegal contracts and asserting title
to money which has arisen from them is distinctly taken in
Page 174 U. S. 662
Tenant v. Elliott and
Farmer v. Russell, and
recognized and approved by Sir William Grant in
Thomson v.
Thomson. But the alleged illegality in this case was not in
the freight's being paid to English subjects claiming as owners of
the ship, as in
Campbell v. Innes. The importation of the
goods in a ship American built, and not professing to have any
English registry, would not be illegal, and the American owner
might assign the freight to anyone. Assuming this to be so, I am of
opinion that, under the authorities referred to, Taylor, who
received the freight on account of himself and Sharp, cannot set up
this defense to Sharp's claim. Upon these grounds, therefore,
independently of the submission in the answer, this part of the
decree is, I think, right."
These observations show that the judgment did not go upon the
illegality arising from a mere violation or neglect of a provision
of an act of parliament relating to vessels, and the agreement was
not classed among those contracts which are of such an illegal
nature that courts refuse to enforce them. Some of the observations
of the chancellor, made by way of illustration regarding the rule
itself have been since doubted by the English courts, as in the
case of
Sykes v. Beadon, supra, where Jessel, Master of
the Rolls, in holding that an illegal contract could not be
enforced by one party to it as against the other, directly or
indirectly, said that there were several
dicta of Lord
Cottenham's in
Sharp v. Taylor which he thought were not
good law, and the Master of the Rolls remarked:
"It is no part of a court of justice to aid either in carrying
out an illegal contract, or in dividing the proceeds arising from
an illegal contract between the parties to that illegal contract.
In my opinion, no action can be maintained for the one purpose more
than for the other."
Continuing, the Master of the Rolls observed:
"Then Lord Cottenham goes on, in
Sharp v. Taylor, to
say:"
"Do the authorities negative this view of the case? The
difference between enforcing illegal contracts and asserting title
to money which has arisen from them is distinctly taken in
Tenant v. Elliott and
Farmer v. Russell,
Page 174 U. S. 663
and recognized and approved by Sir William Grant in
Thomson
v. Thomson."
"Yes, but not in that way. I have already explained what those
cases were. Those were not cases in which one of the two parties to
an illegal contract sought to recover from the other a share of the
proceeds of the illegal contract. Then he goes on to distinguish
Sharp v. Taylor in a way which probably distinguishes it
from cases which would be open to exception on the ground of
criminality. Those are all the authorities to which I think it
necessary to refer. I think the principle is clear that you cannot
directly enforce an illegal contract, and you cannot ask the court
to assist you in carrying it out. You cannot enforce it directly --
that is, by claiming damages or compensation for the breach of it,
or contribution from the persons making the profits realized from
it."
Sharp v. Taylor should not be carried at all beyond the
facts of the case as set out in the report.
In
McBlair v. Gibbes, supra, the question was in
relation to the validity of an assignment by an assignor of his
interest in an illegal contract. The payment of the money arising
therefrom had been, subsequently to the assignment, provided for by
the party owing it, and the dispute arose between the
representatives of the assignor and those of the a signee as to
which were entitled to the share originally due to the assignor. It
was claimed on the part of the representatives of the assignor
that, the original contract being illegal, the sale and assignment
of an interest therein from him to the assignee were also illegal,
and consequently that such interest, equitable or legal, passed to
the assignor's executors. Mr. Justice Nelson, however, in
delivering the opinion of the Court, said:
"But this position is not maintainable. The transaction out of
which the assignment to Oliver arose was unaffected with any
illegality. The consideration paid was not only legal, but
meritorious -- the relinquishment of a debt due from Goodwin to
him. The assignment was subsequent, collateral to, and wholly
independent of the illegal transactions upon which the principal
contract was founded. Oliver [the assignee]
Page 174 U. S. 664
was not a party to these transactions, nor in any way connected
with them. It may be admitted that even a subsequent collateral
contract, if made in aid and in furtherance of the execution of one
infected with illegality, partakes of its nature, and is equally in
violation of law, but that is not this case. Oliver, by the
assignment, became simply owner in the place of Goodwin, and, as to
any public policy or concern supposed to be involved in the making
or in the fulfillment of such contracts, it was a matter of entire
indifference to which it belonged. The assignee took it, liable to
any defense, legal or equitable, to which it was subject in the
hands of Goodwin. In consequence of the illegality, the contract
was invalid, and incapable of being enforced in a court of justice.
The fulfillment depended altogether upon the voluntary act of Mina
or of those representing him. No obligation existed except what
arose from a sense of honor on the part of those deriving a benefit
from the transaction out of which it arose. Its value rested upon
this ground and this alone. The demand was simply a debt of honor.
But if the party who might set up the illegality chooses to waive
it and pay the money, he cannot afterwards reclaim it. And if even
the money be paid to a third person for the other party, such third
person cannot set up the illegality of the contract on which the
payment has been made, and withhold it for himself."
What is meant by a collateral contract, or a cause of action
arising therefrom, which does not require reference to the
principal illegal contract or transaction, is still further
illustrated in
Armstrong v.
Toler, 11 Wheat. 253. In the course of his opinion,
Mr. Chief Justice Marshall assumed the facts to be that the
plaintiff, during a war between this country and Great Britain,
contrived a plan for importing goods on his own account from the
country of the enemy, and goods were also sent to B. by the same
vessel. The plaintiff, at the request of B., became surety for the
payment of the duties which accrued on the goods of B., and was
compelled to pay them, and the question was whether he could
maintain an action on the promise of B. to return this money, and
the
Page 174 U. S. 665
Court held that such an action could be sustained. The Court
said:
"The case does not suppose A to be concerned or in any manner
instrumental in promoting the illegal importation of B, but to have
been merely engaged himself in a similar illegal transaction, and
to have devised the plan for himself, which B afterwards
adopted."
And again:
"The questions whether the plaintiff had any interest in the
goods of the defendant, or was the contriver of, or concerned in, a
scheme to introduce them, or consented to become the consignee of
the defendant's goods, with a view to their introduction, were left
to the jury. The point of law decided is that a subsequent
independent contract, founded on a new consideration, is not
contaminated by the illegal importation, although such illegal
importation was known to Toler when the contract was made, provided
he was not interested in the goods, and had no previous concern in
their importation."
And at
24 U. S.
274:
"In most of the cases cited by the counsel for the plaintiff in
error, the suit has been brought by a party to the original
transaction, or on a contract so connected with it as to be
inseparable from it, as where a vendor in a foreign country packs
up goods for the purpose of enabling the vendee to smuggle them, or
where a suit is brought on a policy of insurance on an illegal
voyage, or on a contract which amounts to maintenance, or on one
for the sale of a lottery ticket, where such sale is prohibited, or
on a bill which is payable in notes issued contrary to law. In
these and in all similar cases, the consideration of the very
contract on which the suit is brought is vicious, and the plaintiff
has contributed to the illegal transaction."
The case of
Armstrong v. Bank, supra, is similar to the
cases of
Tenant v. Elliott and
Farmer v. Russell,
and was decided upon the same principle.
Counsel for the complainant also refer to a case where a
plaintiff had let his horse to the defendant on Sunday, and the
defendant had injured the horse by his recklessness and negligence,
and a recovery against him was had for the damages
Page 174 U. S. 666
occasioned by such negligence notwithstanding the illegality of
the contract of hiring, because in violation of the law relating to
the Sabbath day.
Hall v. Corcoran, 107 Mass. 251.
In that case, the court held the cause of action was not founded
upon the contract, but defendant was held liable by reason of his
improper and neglectful conduct in regard to the horse in his
possession, and which conduct was a violation of the legal duty he
owed to the owner of such horse, irrespective of contract. The case
was a clear instance of a proper recovery based upon collateral
facts, and not founded upon any original illegal contract.
The same principle was held in
Welsh v. Wesson, 6 Gray
505, as the damage done plaintiff by the willful act of defendant
in running into him with his sleigh had nothing to do with the race
they were engaged in.
To the same effect is
Woodman v. Hubbard, 5 Foster
(N.H.) 67. The act of damage to the horse upon which the liability
rested was not connected with or part of the illegal Sunday
hiring.
We think it clear that these cases cited as authority for a
recovery in this case upon the ground of completion of the illegal
contract, or of a new contract upon a good consideration, do not
touch the case before us, with the possible exception of
Sharp
v. Taylor, supra, and that case ought not to be extended.
In the case at bar, the action depends upon the entire contract
between the parties, part of which we hold was illegal. The
partnership part of the agreement cannot be separated from the
rest. The complainant's claim to profits rests upon the entire
contract. His right is based upon that which is illegal and utterly
void, and he cannot separate his cause of action from the illegal
part, and claim a recovery upon the written portion providing for
and evidencing the partnership.
We come now to a consideration of the two cases upon which the
counsel for the complainant specially rely for the maintenance of
this action. They are
Brooks v.
Martin, 2 Wall. 70, and
Planters'
Bank v. Union Bank, 16 Wall. 483. Of the
Page 174 U. S. 667
two cases,
Brooks v. Martin is the more like this one,
although the cases are by no means precisely similar. The
partnership in that case was stated by the court, in its opinion,
to have been really engaged, probably with the full knowledge of
all its members, in dealing in soldiers' claims, long before any
scrip or land warrants were issued by the government, and contrary
to the ninth section of the Act of February 11, 1847, providing for
the granting of land warrants to be issued to the soldiers.
The main object of the ninth section of the act was, as the
Court stated, to protect the soldiers against improper contracts of
the precise character of those shown in the record. It was further
said that the traffic for which this partnership was formed was
illegal, and that, if a soldier who had sold his claim to these
partners had refused to perform his contract, or to do any act
which was necessary to give them the full benefit of their
purchase, no court would have compelled him to do it or give them
any relief against it, or if one of the partners, after the signing
of the articles, had said to the other, "I refuse to proceed with
this partnership because the purpose of it are illegal," the other
partner would have been entirely without remedy. And if, on the
other hand, one of the partners had said,
"I have bought one hundred soldiers' claims, for which I have
agreed to pay a certain sum, which I require you to advance,
according to your contract,"
the other partner might have refused to comply with such demand,
and no court would have given either of the partners any remedy for
such refusal.
The Court further stated that, upon the facts existing, all the
claims purchased by the partner having been turned into land
warrants, and the warrants having been sold or located, and where
the purchase of the claim had been made prior to the date of the
warrant, assignments having been subsequently made by the soldiers,
and the portion of the lands located having been sold partly for
cash and partly on mortgage, and the assets of the partnership
consisting then almost wholly of cash securities or of lands -- all
these facts appearing -- the partner in whose possession the
profits of the partnership
Page 174 U. S. 668
were could be compelled to account by the other partner, and
that the fact that such partner had given a release procured from
him by fraud was no bar to his action for such an accounting.
The action was sustained upon the theory that the purpose of the
partnership agreement had been fully closed and completed --
substantially all the profits arising therefrom had been invested
in other securities or in lands -- and that therefore it did not
lie in the mouth of the partner who had by fraudulent means
obtained possession and control of these funds to say to the other
that the original contract was illegal. The wrong originally done
or intended to the soldier had been wiped out by the acts of the
soldier, and his waiver of any claim by reason of the illegal
contract. The transactions which were illegal, the Court said, had
become accomplished facts, and could not be affected by any action
which the Court might take. The cases of
Sharp v. Taylor,
Tenant v. Elliott, Farmer v. Russell, Thomson v. Thomson, and
McBlair v. Gibbes were cited as authority for the
proposition.
We have already adverted to each of them, and we admit it is
quite difficult to see how, with the exception of
Sharp v.
Taylor, the principle upon which they were decided could be
applied to the case then before the Court.
There is a difference between the case before us and that of
Brooks v. Martin, because in the latter case the fact
existed that the transactions in regard to which the cause of
action was based were not fraudulent, and they related in some
sense to private matters, while in the case before the Court, the
entire contract was a fraud and was illegal, and related to a
public letting by a municipal corporation for work involving a
large amount of money, and in which the whole municipality was
vitally interested. It may be difficult to base a distinction of
principle upon these differences. We do not now decide whether they
exist or not. We simply say that, taking that case into due and
fair consideration, we will not extend its authority at all beyond
the facts therein stated. We think it should not control the
decision of the case now before us.
Page 174 U. S. 669
In
Planters' Bank v. Union Bank, supra, Confederate
bonds had been sent by one party to the other for sale, and the
bonds had been sold by such party as agent of the plaintiff, and
their price paid to such agent of the party selling, and the court
held that an action would lie to recover the proceeds of that sale
thus paid to the plaintiff's agent, although no suit could have
been maintained by plaintiff against the purchaser for the purchase
price of the bonds, because their sale was an illegal transaction.
But when the purchase price of the bonds was paid, it certainly did
not rest with the person who received the money upon an express or
implied promise to pay it over to set up the illegality of the
original transactions. When the bank received the funds, there was
raised an implied promise to pay them to their owner, and a
recovery could be sustained upon the same ground taken in
Tenant v. Elliott and the other cases above mentioned.
It is impossible to refer to all the cases cited from the
various state courts regarding this question. Some of them we
should hesitate to follow. The cases we have commented upon we
think give no support for the claim that the case now before us
forms any exception to the rule which, as we believe, clearly
embraces it. We must take the whole agreement, and remember that
the action is between the original parties to it; that there is no
collateral contract, and no new consideration, and no liability of
a third party. The partnership is but a portion of the whole
agreement.
We must therefore come back to the proposition that to permit a
recovery in this case is in substance to enforce an illegal
contract, and one which is illegal because it is against public
policy to permit it to stand. The court refuses to enforce such a
contract, and it permits defendant to set up its illegality not out
of any regard for the defendant who sets it up, but only on account
of the public interest. It has been often stated in similar cases
that the defense is a very dishonest one, and it lies ill in the
mouth of the defendant to allege it, and it is only allowed for
public considerations, and in order the better to secure the public
against dishonest transactions. To refuse to grant either party to
an illegal
Page 174 U. S. 670
contract judicial aid for the enforcement of his alleged rights
under it tends strongly towards reducing the number of such
transactions to a minimum. The more plainly parties understand that
when they enter into contracts of this nature, they place
themselves outside the protection of the law so far as that
protection consists in aiding them to enforce such contracts, the
less inclined will they be to enter into them. In that way, the
public secures the benefit of a rigid adherence to the law.
Being of the opinion that the contract proved in this case was
illegal in the sense that it was fraudulent and entered into for
improper purposes, the law will leave the parties as it finds
them.
The judgment of the circuit court of appeals was right, and must
be
Affirmed.