Anderson, C. F.

English

Chicago-Kent College of Law

Chicago-Kent Law Review Volume 35 Issue 2 Article 7 April 1957 Sales - Conditional Sales - Whether a Clause Waiving all Defenses, Counterclaims or Cross-Complaints in Favor of an Assignee of a Note Bars the Defense of Failure of Consideration C. F. Anderson Follow this and additional works at: https://scholarship.kentlaw.iit.edu/cklawreview  Part of the Law Commons Recommended Citation C. F. Anderson, Sales - Conditional Sales - Whether a Clause Waiving all Defenses, Counterclaims or Cross-Complaints in Favor of an Assignee of a Note Bars the Defense of Failure of Consideration, 35 Chi.-Kent L. Rev. 141 (1957). Available at: https://scholarship.kentlaw.iit.edu/cklawreview/vol35/iss2/7 This Notes is brought to you for free and open access by Scholarly Commons @ IIT Chicago-Kent College of Law. It has been accepted for inclusion in Chicago-Kent Law Review by an authorized editor of Scholarly Commons @ IIT Chicago-Kent College of Law. For more information, please contact jwenger@kentlaw.iit.edu, ebarney@kentlaw.iit.edu. DISCUSSION OF RECENT DECISIONSSALES-CONDITIONAL SALES-WHETHER A CLAUSE WAIVING ALLDEFENSES, COUNTERCLAIMS OR CROSS-COMPLAINTS IN FAVOR OF AN ASSIGNEEOF A NOTE BARS THE DEFENSE OF FAILURE OF CoNsmERATIoN-The Ap-pellate Court for the First District of Illinois was recently asked, in thecase of Commercial Credit Corporation v. Biage,1 to determine a hithertounraised question in Illinois. The defendant therein had signed a note,appurtenant to a conditional sales contract, containing an agreementnot to assert any defense against an assignee thereof.2 The note was as-signed to the plaintiff who ultimately confessed judgment thereon. Ina motion to open the judgment, the defendant alleged that the considera-tion for the note had failed. The trial court, however, denied his motionwhen it concluded that the waiver embodied in the conditional sales con-tract prevented the assertion of such a defense. On appeal, the review-ing tribunal indicated its agreement with the interpretation of the trialcourt and held the waiver provision valid on the ground that it was per-mitted by the Uniform Sales Act.3 Affirmance followed as a matterof course.4Conditional sellers have long sought a formula for quick negotiabilityof consumer conditional sales contracts. Since it would seem that suchcontracts are almost invariably assigned or discounted, any element ofnegotiability which a seller can embody in the contract will tend to makethe paper more appealing to financiers, since then the risk of loss re-sulting from a breach of contract by the seller will fall on the conditionalbuyer and not the assignee. In an effort to import to their contracts oneof the most important characteristics of negotiability, namely, freedomfrom defenses possessed by the obligor when the instrument passes toan assignee, the conditional sellers have inserted no-defense clauses likethat in the instant case, 5 included negotiable notes evidencing the pur-l 11 Ill. App. (2d) 80, 136 N. E. (2d) 580 (1956).2 The clause in the contract read as follows: "This contract may be assignedand/or said note may be negotiated without notice to me and when assignedand/or negotiated shall be free from any defense, counterclaim or cross-complaintby me."3 Ill. Rev. Stat. 1955, Vol. 2, Ch. 121Y, § 71, which reads as follows: "Where anyright, duty or liability would arise under a contract to sell or a sale by implicationof law, it may be negatived or varied by express agreement . . ."4 The court, in its opinion, made mention of the fact that while there was muchdiscussion in the briefs regarding the laws of negotiable instruments, they felt thatreference thereto was unnecessary to achieve the decision in view of the provisionIn the Uniform Sales Act.5 See American Nat. Bank. v. A. G. Sommerville, Inc., 191 Cal. 364, 216 P. 376(1923).CHICAGO-KENT LAW REVIEWchase price along with the contract,6 and have also gone as far as to draftthe contract itself as a promissory note.7It is a fundamental axiom of the law of contracts that there mustbe a good and valuable consideration flowing between the parties theretoor no binding agreement can result. Once a substantial failure of thepurported consideration is proved, the contract becomes unenforceableas between the parties8 and may be rescinded. 9 Thus one would expectthat the question to be initially determined would be that of the validityof the original contract of which the waiver clause is a part. It wouldseem apparent that with the unlimited use of such waiver clauses theaforementioned axiom will become the exception and not the rule sincethe waiver clause holds the contract up by its own bootstraps and wouldcircumvent any attempt to look to the original agreement for its formalnecessities. In determining the validity of the no-defense clauses, how-ever, the courts do not seem to base their decisions on the nature of theparticular defense sought to be asserted, to-wit, failure of consideration,fraud, breach of warranty, etc., but rather upon the basic validity of theclause itself as affecting all such defenses. Those courts which have madean effort to give some protection to the consumer buyer, by refusingto uphold such a waiver or cut-off clause, have advanced a number ofinterrelated reasons for so doing. At least one jurisdiction has heldsuch clauses invalid for violating an existing state statute, insofar as theydenied the right to utilize defenses which existed before notice of theassignment. 10 It has also been held that a conditional sales contract whichdoes not on its face meet the elements of negotiability, cannot achievesuch a position by the use of a waiver clause providing for negotiablecharacter of the instrument, since only an instrument complying withthe requirements of the statute is negotiable." Still a further reason forholding such a clause invalid was advanced in the case of Bridger v.6 Jones. The Law of Chattel Mortgages and Conditional Sales (The Bobbs Mer-rill Co., Indianapolis, 1933), 6th Ed., Vol. 3, §§ 940-2, pp. 48-52, and cases citedtherein.7 See Abingdon Bank & Trust Co. v. Shipplett-Moloney Co., 316 Ill. App. 79, 43N. E. (2d) 857 (1942).8 See 17 C. J. S., Contracts, § 129, p. 476, and cases cited therein.9 Ibid., § 420, p. 905, and cases cited therein.10 San Francisco Securities Corp. v. Phoenix Motor Co., 25 Ariz. 531, 220 P. 229(1923). The statute involved was Ariz. Civ. Code 1913, par. 402, and providedthat "an action by the assignee shall be without prejudice to any defense existingbefore notice of the assignment . . ."11 Motor Contract Co. v. Van Der Volgen, 162 Wash. 449, 298 P. 705 (1931);American Nat. Bank v. A. G. Sommerville, Inc., 191 Cal. 364, 216 P. 376 (1923).DISCUSSION OF RECENT DECISIONSGoldsmith12 where the defense was that of fraud. The court there heldthat the fraud involved vitiated the entire contract of which the waiverclause was a part. Further approaches used to deny the validity of theclauses are that the assignee under such a contract acquires the rightsas well as the liabilities of the seller and thus stands in his shoes as toall defenses which the buyer has against his vendor ;18 or is held to bea party to the agreement;14 or that he had a duty to see that the mer-chandise or equipment involved performed adequately.15While all of the foregoing decisions have been achieved by applica-tion of existing principles of law, the great compulsion which seemsto underlie most of them is that of public policy. It must be admittedthat the term public policy is ambiguous and somewhat obscure, but itseems to be the only one available to embrace the many bases which thecourts use in denying the validity of the no-defense clauses. It is gen-erally considered that parties may agree to waive contract, statutory, orother rights, unless a question of public policy is involved. 16 Thus whilesome of the courts have gone to great lengths to justify their decision,the majority of those which hold such clauses invalid, have done so onthe basis of public policy.17 The feeling of these courts seems to be bestexpressed by the statement of O'Brien, J. in the Bridger case wherehe said, "it is difficult to conceive that such a clause could ever be sug-gested by a party to a contract unless there was in his own mind at leasta lingering doubt as to the honesty and integrity of his conduct. Public12 143 N. Y. 424, 38 N. E. 458 (1894) ; see also, First Acceptance Corp. v. Kennedy,95 F. Supp. 861 (1951) (where a waiver of fraud clause is embodied in a fraudu-lently obtained contract, the waiver clause is ineffective as to the defense offraud) ; and Ebenreiter v. Freeman,-Wis.-, 79 N. W. (2d) 649 (1956) (conditionalsales contract invalid, thus the waiver clause therein is of no effect).13 Bulldog Concrete Forms Sales Corp. v. Taylor, 195 F. (2d) 417 (1952), af-firming 94 F. Supp. 328 (1952) ; Parker v. Funk, 185 Cal. 347, 19K P. 83 (1921)First Lumberman's Nat. Bank v. Buckholz, 220 Minn. 97, 18 N. E. (2d) 771 (1945)Universal Credit Co. v. National Radio Mfg. Co., 174 Okla. 178, 49 P. (2d) 743(1935) ; Mercantile Trust Co. v. Roland, 143 Okla. 190, 288 P. 300 (1930) ; Gen.Elec. Cont's. Corp. v. Heimstra, 69 S. D. 78, 6 N. W. (2d) 445 (1942) ; Pearson v.Picco, 181 Wash. 613, 44 P. (2d) 186 (1935).14 Commercial Credit Co. v. Childs, 199 Ark. 1073, 137 S. W. (2) 260 (1940).15 C. V. Hill & Co. v. Hadden's Grocery, 299 Ky. 419, 185 S. W. (2d) 681 (1941).16 12 Am. Jur., Contracts, § 181, p. 682.17 Equipment Acceptance Corp. v. Arwood Can Mfg. Co., 117 F. (2d) 442 (1941)San Joaquin Finance Corp. v. Allen, 102 Cal. App. 400, 283 P. 117 (1929)American Nat. Bank v. A. G. Sommerville, Inc., 191 Cal. 364, 216 P. 376 (1923)Pacific Acceptance Corp. v. Whalen, 43 Idaho 15, 248 P. 444 (1926) ; IndustrialLoan Co. v. Grisham,-Mo. App.-, 115 S. W. (2d) 214 (1938) ; Progressive Finance& Realty Co. v. Stempel, 321 Mo. App. 721, 95 S. W. (2d) 834 (1933) ; State Nat.Bank of El Paso, Tex., v. Cantrell, 47 N. M. 389, 143 P. (2d) 592 (1943) ; MotorContract Co. v. Van Der Volgen, 162 Wash. 449, 298 P. 705 (1931) ; Malas v. Louns-bury, 193 Wis. 531, 214 N. W. 332 (1927) ; D. M. Osborne & Co. v. M'Queen, 67 Wis.342, 29 N. W. 636 (1886).CHICAGO-KENT LAW REVIEWpolicy and morality are both ignored if such an agreement can be giveneffect in a court of justice."1 A further element of public policy whichurges the judicial repudiation of such clauses is that they are designedto settle in advance the substantive rights of the parties under the con-tract and oust the courts of their jurisdiction to determine such rights.As was said in Industrial Loan Co. v. Grisham,19 "after a right has accrued,a party may waive his rights, but it is not permissible for him to stipu-late in advance that in the event of differences arising in the future hewill deny himself the right to resort to the courts for their settlement."This is an expression of the idea that the state has an interest in all ofits inhabitants which interest demands that the rights of all should beprotected and enforced according to the course of jurisprudence whichhas been provided.The instant case does, however, find much support in many caseswhere the courts have given full effect to such waiver clauses.20 Whilethey recognize that at the time of the sale the parties should have aright to place in their contract any terms or conditions which are notunlawful or against public policy, the dividing point seems to involvea question of just what is against public policy. The general feeling inmost of these cases is that this type of clause is not injurious to the publicor against the public good and that to deny to men of full age and com-petent understanding the right to deal as they see fit would prove to beeven worse than the results of holding such clauses valid.21  The deci-sion in the instant case receives its greatest support from the case ofUnited States v. Troy-Parison, Inc.,22 where the United States Court ofAppeals for the Ninth Circuit said that "the provision does not runcounter to the declared policy of Idaho, since the state code allowsparties to negative their rights and duties arising under a contract, byexpress agreement. ' 28 The court, however, did limit its decision to in-stances of breach of warranty.The problem of determining the validity of the no-defense clauses18 Bridger v. Goldsmith, 143 N. Y. 424, 38 N. E. 458 (1894).19-Mo. App. -, 115 S. W. (2d) 214 (1938).20 See United States v. Troy Parison, Inc., 115 F. (2d) 224 (1940) ; RefrigerationDiscount Corporation v. Haskew, 194 Ark. 549. 108 S. W. (2d) 908 (1937); A. J.Colson & Sons v. Ellis, 50 Ga. App. 768, 151 S. E. 654 (1930) ; Elzey v. Ajax Heat-ing Co., 10 N. J. Misc. 281, 158 A. 851 (1932); Glens Falls Nat. Bank & Trust Co.v. Sansivere, 136 N. Y. S. (2d) 672 (1955) ; President and Directors, Etc. v. Mono-gram Associates, 276 App. Div. 766, 92 N. Y. S. (2d) 579 (1949) ; National CityBank v. Prospect Syndicate, 170 Misc. 611, 10 N. Y. S. (2d) 759 (1939) ; SecurityHolding Co. v. Christensen, 53 S. D. 37, 219 N. W. 949 (1928); Anglo-CaliforniaTrust Co. v. Hall, 61 Utah 223, 211 P. 991 (1922).21 Elzey v. Ajax Heating Co., 10 N. J. Misc. 281, 158 A. 851 (1932).22 115 F. (2d) 224 (1940).23 115 F. (2d) 224 at 226.DISCUSSION OF RECENT DECISIONSseems to be one which demands the attention and voice of the legislaturefor its ultimate determination. While the holding in the instant caseseems at first blush extremely inconsistent with the original attitudein Illinois toward the validity of conditional sales contracts, 2 4 one mustadmit that the present status of the law justifies such a holding. Unlessthe court is willing to realize the position and limited legal understandingof the average buyer under such a contract, thus necessitating the publicpolicy argument, it can come to no other conclusion than that of enforcingthe contract in its entirety. The law, as a general proposition, says thatcourts cannot rewrite contracts into which parties have seen fit to enterand that a man is bound by his contract. When such principles arebacked up by clauses such as that in the Illinois Sales Act,25 the courtsare left no alternative other than some aspect of public policy. If thepublic are to be given adequate protection in their commercial dealings,such protection must come from the law making body. Such a stepin the right direction has been taken in the Uniform Commercial Code,26which to date has had but limited acceptance.2 7  It is not the purpose ofthis note to decide whether this provision or some other means is theanswer to a growing problem but rather to point out the need of somedefinite determination of the issues involved. In this light, it might wellbe asked, is there a place in our social order for the seller who, in hisdealings with the public, needs an accompanying waiver to carry hisluggage?C. F. ANDERSONTORTS-INVASION OF PERSONAL SAFETY, COMFORT, OR PRIVACY-WHETHER PUBLIC EXPLOITATION OF A DEBTOR'S PERSONAL AFFAIRS BY ACOLLECTION AGENT IS AN INVASION OF THE DEBTOR'S RIGHT OF PRIVACY-Asignificant problem concerning a debtor's right of privacy came beforethe Supreme Court of Ohio for the first time in the case of Housh v. Peth.'24 See Gilbert v. Nat. Cash Register Co., 176 Ii1. 288, 52 N. E. 22 (1898) ; andBrundage v. Camp, 21 Ill. 329 (1859). Both were overruled in Sherer-Gillett Co.v. Long, 318 Ill. 432, 149 N. E. 225 (1925). The original attitude of the courts inIllinois was that a secret reservation of title to personal property amounted to aconstructive fraud and was invalid against a bona fide purchaser or subsequentIncumbrancer for value.25 Ill. Rev. Stat. 1955, Vol. 2, Ch. 1211, § 71.26 Uniform Commercial Code, Part 2, § 9-206, which reads in part as follows:"An agreement by a buyer of consumer goods as part of the contract for salethat he will not assert against an assignee any claim or defense arising out of thesale is not enforceable by any person."27 Kohn, "The Present Status of the Uniform Commercial Code," 45 Il1. B. J. 224(1956). Although the code was immediately referred to legislative committees ina number of states, it has since become law only in Pennsylvania.1 165 Ohio St. 35, 133 N. E. (2d) 340 (1956), affirming-Ohio--, 135 N. E. (2d)440 (1955), noted in 7 Western Res. L. Rev. 452 and 2 Wayne L. Rev. 240. Hart,J. wrote a dissenting opinion, concurred in by Stewart and Taft, J. J.

Sales - Conditional Sales - Whether a Clause Waiving all Defenses, Counterclaims or Cross-Complaints in Favor of an Assignee of a Note Bars the Defense of Failure of Consideration

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Sales - Conditional Sales - Whether a Clause Waiving all Defenses, Counterclaims or Cross-Complaints in Favor of an Assignee of a Note Bars the Defense of Failure of Consideration

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