Title: Sorenson v. Gardner

State: oregon

Issuer: Oregon Supreme Court

Document:

LUSK, J.
This is an action for deceit in which the plaintiffs recovered a judgment for $2,000 and the defendants have appealed.

            *258The action grows ont of the sale of a dwelling house in Oswego, Clackamas County, Oregon, by Arthur Tillen and his wife, the then owners, to the
            plaintiffs, and is based upon false representations relative to the construction of the house alleged to have been made by the defendants to the plaintiffs and upon which they relied and which induced them to make the purchase. The defendant,
            Charles D. Gardner, built the house in question but had sold it, and at the time that the plaintiffs purchased it he and his wife were living in a house on adjoining property. The complaint alleges that the defendants falsely represented to
            the plaintiffs that the house was well constructed in a workmanlike manner and met all minimum code requirements, particularly with respect to electric wiring, plumbing, septic tank and sewage disposal arrangement, and that the well was properly
            constructed and with the existing pump would deliver 950 gallons of pure water per hour and would meet all health standards and building code requirements. The plaintiff introduced evidence in support of these allegations and evidence tending
            to show that the representations were false.
There are two assignments of error. The first is directed to the court’s denial of the defendant’s motion for a directed verdict which was based upon the grounds, first, that the evidence fails to show that the representations were false or made
            recklessly without knowledge of the truth, or that they were made with the intention that they should be acted upon by the plaintiffs, and, second, that the defendants were third parties with no interest in the transaction.
In support of the first ground of the motion, it is argued that the misrepresentations alleged are mere expressions of opinion or representations of law and *259therefore
            not actionable. This may be true of the representation that the house was well constructed in a workmanlike manner; see Horner v. Wagy, 173 Or 441,
            455-457, 146 P2d 92; but the representation that the well with the existing pump would deliver 950 gallons of water per hour is one
            of fact.
With respect to the other charges in the complaint, it is a general rule that fraud can not be predicated upon misrepresentations of law or misrepresentations as to matters of law. 23 Am Jur 809, Fraud and Deceit § 45. Thus, misrepresentations
            concerning the legal effect of an instrument have been held to be not actionable. Ball v. Associated Oil Company, 151 Or 383,
            389, 50 P2d 125; McFarland v. Hueners, 96 Or 579,
            589, 190 P 584; Wicks v. Metcalf, 83 Or 687,
            163 P 434, 163 P 988, LRA 1918A 493.
            The reason usually given for the rule is that every one is presumed to know the law, and therefore misrepresentations as to the legal effect of a particular instrument and the like are regarded as mere expressions of opinion; McFarland v. Hueners, 
            supra; Baldock v. Johnson, 14 Or 542,
            548, 13 P 434; though, as Dean Prosser says: “* * * two reasons have been repeated, sometimes in the same decision: first, that every man is presumed
            to know the law, and hence the plaintiff cannot be heard to say that he reasonably believed the statement made to him; and second, that no man, at least without special training, can be expected to know the law, and so the plaintiff must have
            understood that the defendant was giving him nothing more than an opinion.” Prosser, Torts (2d ed) 559-560, § 90. The basis of the rule has been criticized by courts and textwriters. See Rosenberg v. Cyrowski, 227 Mich 508,
            198 NW 905; Stark v. Equitable Life Assurance Society, 205 Minn 138, 285 NW 466, 469: 32 Col L Rev 1019: 15 Tex L Rev 409. *260See, also, 5 Williston, Contracts (rev ed) §§ 1494, 1495. And, as far back as 1887, this court
            said of the analogous question of the distinction between mistake of law and of fact that many of the cases come so near the border line that the point of demarcation is not always apparent. Baldock v. Johnson, supra.
The rule of the Restatement of Torts upon this subject is as follows:
In' the comment on Subsection (1) of the foregoing, it is said, “If a representation concerns the legal effect of facts not disclosed or not otherwise known to the recipient, it may justifiably be interpreted as implying that there are facts which
            substantiate the statement * * *. So, too, the assertion of title to a particular tract of land asserts the existence of those conveyances or relationships which are necessary to vest the title- in the alleged owner. On the other hand, if
            all the facts believed by the maker to exist are stated to the recipient or otherwise known by him and from these facts the maker of the representation asserts that title vests in the person in question as a legal consequence, the representation
            is an expression of opinion and the case falls within Subsection (2).”

            *261This court gave adherence to the essence of the rule of the Restatement when it approved the statement in 20 Cyc 18 that an expression of opinion
            by one having superior knowledge “may amount to an implied assertion that he knows facts which justify his opinion, and thus his statement may become actionable as a false statement of fact.” Boelk v. Nolan, 56 Or 229, 237, 107 P 689. An instructive case upon the subject is Seeger v. Odell, 
            18 Cal2d 409, 115 P2d 977, 136 ALR 1291, in which the court stated the rule thus: “If, however, the opinion or legal conclusion misrepresents the facts upon which it is based or implies the existence of facts which are non-existent,
            it constitutes an actionable misrepresentation.” See Annotation, 136 ALR 1299.
Here we are dealing with a number of alleged misrepresentations to the effect that the house in question complied with the minimum requirements of state law. For illustration, it is alleged that the defendants represented to the plaintiffs “that
            the plumbing was adequate and complied with all the building code requirements and was properly vented as required by said code.” The statute, ORS 447.110 and 447.120, contains specific provisions as to vents, their size, location, the material
            of which they shall be made, etc. There was evidence that in certain particulars the requirements of the code were not met, and evidence from which the jury could find that the defendants knew and the plaintiffs did not what the facts were
            in this regard. Under the rule as formulated by the Restatement, had the plaintiffs been aware of these facts and had the defendants represented to them that the facts as so known constituted a compliance with the law, then the misrepresentation
            in question would have been one of law and not of fact. But, the plaintiffs *262being ignorant of the facts, the representation in the circumstances
            was one of fact and the case is covered by Subsection (1) of Section 545 of the Restatement of Torts. This is not a case to which the maxim that ignorance of the law excuses no one can be applied. The plaintiffs are not relying on their ignorance
            of the law but of the facts, and the alleged representations carried with them the implication that the facts were otherwise than the evidence shows them to have been. They concerned “the legal effect of facts not disclosed or otherwise known
            to the recipient.”
The only cases which have come to our attention involving representations similar to those in the instant case are Mullin v. Rousseau, 112 CalApp 719,
            297 P 944, and Finch v. McKee, 18 CalApp2d 90,
            62 P2d 1380, both decisions of district courts of appeals of California. The former case held that the representations were not actionable,
            while the latter ruled to the contrary.
Our own conclusion, which accords with the rule of the Restatement, is that such representations may, and in this case do, relate to matters of fact. Therefore, the contention of the defendants in support of the first ground of the motion for
            a directed verdict can not be sustained. .
 The other ground of the motion, namely, that the defendants were third parties without any interest in the transaction, is ruled by Boord v. Kaylor, 100 Or 366,
            375, 197 P 296, where this court quoted with approval the following statement of the law from 20 Cyc 43: “While in a majority of
            cases defendant has been a gainer by reason of his fraud, it is not essential to his liability that he should obtain any benefit or advantage from the transaction into which he has led plaintiff.” This decision was followed in Boord v. 
            *263
            Kaylor, 114 Or 62, 66, 234 P 263.
            See, also, Prosser, Torts (2d ed) 538, § 88; Pasley v. Freeman, 3 TR 51, 100 Eng Rep 450 (KB 1789); 37 CJS 297, Fraud § 44, and cases there cited. The questions whether the representations were made with knowledge of their falsity
            and with the intention that they should be relied on by the plaintiffs and whether the plaintiffs were induced by them to purchase the property were for the jury.
The second assignment of error is based upon an instruction given by the court on the measure of damages. The instruction is as follows:
The foregoing instruction embodies what is known as the “benefit of the bargain rule.” See Selman v. Shirley, 161 Or 582, 85 P2d 384, 91 P2d 312, 124 ALR 1. Defendants contend that this is not the correct rule in this case.
No exception to the instruction on the ground now urged was taken by counsel for defendants. They have attempted to raise the question by assigning as error the court’s denial of their motion for a new trial, based on the giving of the instruction.
            That, of course, is not the proper method for obtaining appellate review of an error in instructions. Nevertheless, the error was so palpable and so prejudicial to the rights of the defendants that we consider it our duty to notice it under
            the authority reserved to this court by rule 50 of the rules of the supreme court.1 See Kuhnhausen v. Stadelman, 174 Or 290, 309-312, 148 P2d 239, 149 P2d 168.
In Selman v. Shirley, supra, we held that in an action for deceit the benefit of the bargain rule may be applied as the correct measure of damages where *265the
            facts justify it. Under that rule, the measure of the damages sustained by the purchaser where a purchase has been induced by fraud is the difference between the real value of the property purchased and the value which it would have had if
            it had been as represented. It is not an exclusive rule, but one to be flexibly applied as the circumstances of the case may demand. Selman v. Shirley, supra at 607-608. See, also, Horner v. Wagy, supra at 444-449. In numerous Oregon cases this court has applied the out of pocket loss measure of damages, that is to say, the difference between the real value of the property
            and the price which the purchaser was induced to pay. See, e.g., Castleman v. Stryker, 107 Or 48, 213 P 436. The reason why this rule is considered inadequate at times is stated in Sutherland on Damages (4th ed), § 1172, quoted with approval in Selman v. Shirley, supra
            at page 606:
Otherwise stated, the theory behind the benefit of the bargain rule is that if fraudulent representations constitute a warranty also, recovery may be had on that basis. Selman v. Shirley, supra at page 607; 5 Williston on Contracts (rev
            ed) §1392; Restatement of *266Torts, § 549, comment g. p 116. Obviously, in a case like this there is no warranty and no advantage which would inure
            to the wrongdoer, because there is no contract between the purchaser and the maker of the representations. Thus, the reason for the rule is absent and the rule is, therefore, not applicable, where, as in this case, the person charged with
            fraudulent misrepresentations is not the seller of the property, has no interest in the transaction, is not a party to the bargain, but a disinterested third party. It was so decided in Macdonald v. Roeth, 179 Cal 194, 176 P 38. .The case involved two sales of stock, one directly by the
            defendants to the plaintiff, the other by a third party to the plaintiff. In each instance the defendants were charged with making false representations which induced the sale. The court, after holding that it was proper to apply the benefit
            of the bargain rule to the former sale, held that it was reversible error to apply it to the transaction in which the stock was purchased from a third party and not from the defendants. With respect to the latter transaction, the court said:
            “As to these defendants, therefore, he [the plaintiff] had no bargain to the benefit of which he was entitled.”
Plaintiffs’ measure of damages, if they suffered any, was the difference between the purchase price and the true market value of the property purchased. Ward v. Jenson, 87 Or 314, 317, 170 P 538. The judgment in this case could only be affirmed by closing
            our eyes to the fundamental error which underlies it, for not only were the jury given a wrong rule for measuring damages, but there is no evidence which would have enabled them to apply the right rule and none which would support a judgment
            in any amount. The price which the plaintiffs paid for the property was not shown. For all that appears, the property was *267worth every cent they paid,
            and if that be the case they suffered no loss and have no cause of action against the defendants. Castlemam v. Stryker, supra.            To correct so manifest an error and obviate the probability of a miscarriage of justice, we must reverse the judgment and remand the cause for a new trial.
The court submitted to the jury a demand for punitive damages in the complaint, but the jury disallowed the claim. There was no evidence which would have justified an award of punitive damages. On another trial the jury might not be so wise, and
            the issue should be withdrawn by the court.
Reversed.
 In appeals in actions at law no alleged error of the circuit court will be considered by this court unless regularly assigned as error in the appellant’s opening brief, except that this court reserves the right to take notice of an error of
                law apparent on the face of the record. * * *.