Case ID: ohio-st_79/html/0372-01.html
Source: Caselaw Access Project
Author: {"author": "\n      Spear, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Doan v. Rogan.
    
      Written contract to form partnership — To be succeeded by corporation■ — General conduct of corporation set forth — Contract does not lack consideration — And is enforceable, when — Stipulation for liquidated damages for breach — Not construed as penalty, when.
    
    1. A contract in writing by which the parties agree to form a present partnership for the establishment of a mercantile business, to be succeeded afterward by a corporation of which the parties are to be directors, and the general conduct of which is set forth in the agreement, one of the parties to furnish the capital and devote a portion of his time to the conduct of the business, and the other to give his entire and undivided attention to the business for a period of three years, and to receive a fixed salary therefor, also to share in the profits, but to be protected by the one who is to furnish the capital from any liability for debts incurred, is not invalid as lacking consideration or mutuality, but is an enforceable contract.
    2. Whether a stipulation providing for liquidated damages for the breach of a contract is to be construed as liquidated damages or as a penalty depends upon the intention of the parties to be gathered from the entire instrument. While courts will not construe contracts in a way authorizing recovery for liquidated damages simply because the parties have used that term in the agreement, yet, where parties to a contract otherwise valid have in terms provided that the damages of the injured party by a breach on the part of the other of some particular stipulation, or for a total breach, shall be a certain sum specified as liquidated damages, and it is apparent that damages from such breach would be uncertain as to amount and difficult of proof, and the contract taken as a whole is not so manifestly unreasonable and disproportionate as to justify the conclusion that it does not truly express the intention of the parties, but is consistent with the conclusion that it was their intention that damages in the amount stated should follow such breach, courts should give effect to the will of the parties as so expressed and enforce that part of the agreement the same as any other.
    (No. 10655
    Decided February 2, 1909.)
    Error to the Circuit Court of Cuyahoga county.
    Action below was to recover damages for breach of the following contract:
    “This Agreement by and between Michael J. Rogan, Seth H. Doan, Dudley J. Mahon and Conrad Roth, witnesseth:
    “First. That it is hereby mutually agreed .between the parties hereto that a corporation shall be organized under the laws of Ohio for the purpose of carrying on in Cleveland, Ohio, a retail clothing business. That said company shall have a capital stock of thirteen thousand dollars ($13,-000.00) divided into thirteen hundred shares of ten dollars ($10.00) each, the name of the same to be The Rogan Clothing Company.
    “Second. That it is understood and agreed between the parties hereto that the said Michael J. Rogan is to pay to such corporation when formed the sum of five thousand dollars ($5,000.00) in cash and to receive therefor 500 shares, of the paid up capital stock of said company. That to each of the other parties to this' agreement there is to be issued one share of the capital stock of said company.
    “Third. That in said corporation it is hereby agreed that each of the parties hereto are to be directors and that said Michael J. Rogan is to be the president of said corporation, Seth H. Doan, the treasurer and general manager, Dudley J. Mahon, the secretary, and Conrad Roth the vice-president.
    “Fourth. That during the first year said Michael J. Rogan as such president is to draw no salary, but during such time as he is in Cleveland attending to the business of said company his necessary expenses are to be paid by the company.
    “Fifth. That said Seth H. Doan as such treasurer and general manager is to receive the sum of thirty-five dollars ($35.00) per week and the sum of four hundred dollars ($400.00) as a bonus at the end of the year. That said Dudley J. Mahon and Conrad Roth as the secretary and vice-president of said company are to each receive the sum of twenty-seven and 50-100 dollars ($27.50) per week, said salaries to commence August 1, 1903.
    “Sixth. That at the expiration of every six months a complete inventory is to be taken, based on the market value of the goods at the time of the taking said inventory and any profits are to be divided into four equal parts and shares of the said capital stock are to be issued said four persons to the extent of the said profits, and the same course is to be followed until all the remaining' stock, to-wit, the said seven hundred' and ninety-seven (797) shares have been issued. And after said stock is paid up, the profits are to be divided into four equal parts and paid to the.four parties to this agreement by way of dividends for the period of three years from this date.
    “Seventh. That upon the final dissolution of the temporary partnership hereby formed, or the fin,al distribution of the assets of the corporation to be formed, and in the determination of all profits and dividends, the said five thousand dollars ($5,000.00) paid by Michael J. Rogan is to be treated as if it were a liability of the partnership or corporation, although the same is not in fact to be really a' debt, but merely a first charge on the assets'after the real debts have been paid. But interest on said sum is to be paid by the partnership to said Michael J. Rogan at the rate of six (6) per cent, per annum, and when said five hundred (500) shares of stock are issued to him for said sum he is to be paid six (6) per cent, per annum by said corporation, but is to receive by reason of said five hundred (500) shares no further share in the profits, whatsoever, for the period of three years from this date.
    “That the said Michael J. Rogan hereby guarantees to protect said Seth H. Doan, Dudley J. Mahon and Conrad Roth from any liability for any debts incurred by the said corporation in the purchase of goods, it being mutually understood and agreed that no goods are to be purchased or debts incurred without the written consent of Michael J. Rogan, and that no note, draft, check or writing of said parties or the said corporation is to have any validity whatsoever until the same has been countersigned by said Michael J. Rogan.
    ■ “That all checks, drafts, notes and instruments are to be executed for said corporation by said Seth H. Doan, its treasurer, and then countersigned by said Michael J. Rogan, the president.
    “Eighth. That said Michael J. Rogan as such president is to have the power to discharge any officer or employe of the company for just cause.
    “Ninth. That said Seth H. Doan, Dudley J. Mahon and Conrad Roth are to give their entire and undivided attention to the business of the company and to faithfully discharge. their duties. That said Seth H. Doan is to perform the work usually done by a general manager and to exercise the usual authority of said officer. That each of said persons during the period of three years from this date will give all of their time to said business and engage in no other occupation or business enterprise whatsoever.
    “Tenth. That neither of the parties hereto, or any member of the company shall sell any goods upon credit. That if any goods are so sold the same are to be at once charged against the individual making the sale and he is to settle for the same within thirty days from the time of the sale.
    “Eleventh. That if any delay should occur in the formation of the corporation above referred to, in the meantime this agreement from its execution shall be considered as creating a partnership bet-tween the parties hereto, the same to continue upon the terms above provided for the period of at least three years.
    
      “Twelfth. That if either said Seth H. Doan, Dudley J. Mahon or Conrad Roth shall sever his connection with the said temporary partnership or said corporation without the consent of Michael J. Rogan and within three years from this date the person so offending shall pay said Michael J. Rogan the sum of one thousand dollars ($1,000.00) as his liquidated damages.
    “Thirteenth. That when said corporation has been formed such clauses shall be inserted in the regulations and by-laws as may be necessary to give effect to any of the stipulations herein.
    “In witness whereof the parties hereto set their hands at Cleveland, Ohio, June 24th, 1903.
    “(Signed) “M. J. Rogan,
    “Seth H. Doan, “Conrad Roth,
    “Dudley J. Mahon.”
    The breach consisted in a violation of the twelfth clause of the contract and arose by reason of the plaintiff in error (defendant below) Seth H. Doan, refusing to go on with or in any way performing his agreement as expressed by the contract.
    Doan’s answer contained an admission of the making of the contract and a general denial otherwise. Also that the contract was without consideration and was void for illegality and want of mutuality; that Rogan had suffered no loss in the premises; and that before the contract was accepted by • the corporation to be formed, and before plaintiff had expended any money in proceeding to carry out the terms of the contract, defendant withdrew from the arrangement and notified plaintiff and the other signers of the instrument that he could not carry out the terms specified to be performed by him.
    The case was tried in the common pleas to a jury. These facts were disclosed at the trial: The plaintiff, Michael J. Rogan, a resident of Detroit, Michigan, desiring tp engage in the clothing- business at Cleveland, and not being himself acquainted with the trade at that place, entered into negotiations with Seth H. Doan, Conrad Roth and D. J. Mahon, salesmen then in the employ of a larg'e .mercantile establishment in that city, for their co-operation, which resulted June 24, 1903, in the making of the contract copy of which is hereinbefore given. A location was determined upon on Euclid avenue in the building known as the Arcade, at which location the contract was signed by the parties. Doan was to be the treasurer and general manager and was to receive, as stated in the contract, thirty-five dollars per week and four hundred dollars yearly as bonus; the other two less salaries, and Rogan to receive no salary. Ele was to put in five thousand dollars capital and receive six per centum interest on that. Relying upon the stipulation of these persons as expressed in the contract, and apparently especially relying upon that of Doan, Rogan, in the presence of Doan, and with verbal assurance of intention to stand by his agreement,, entered into a three-year written lease with the Arcade company in his own name, from August 15, 1903, of four rooms in the Arcade for store purposes at a monthly rental of one hundred and fifty dollars. The day the contract was signed, and after executing the lease, Rogan left for the East for the purpose of buying goods for the store expecting that the other three would meet him in Rochester a day or two later. After the execution of the contract and of the lease, Doan, Roth and Mahon resigned their positions with their former employer, and the next day Roth and Mahon went on to Rochester to meet Rogan. Doan, being advised b}r Roth and Mahon that they were going to meet Rogan and expected them to accompany them, finally, after some negotiation, declined to go and the other two left without him. Doan sent no word to Rogan, and did not afterwards communicate with him. His conduct was in effect a refusal to go on with the contract and a breach of it. Rogan, with Roth and Mahon, went on with the business, each performing the contract on his part.
    During the month of July following the contemplated corporation was formed by the three contracting parties, two others being associated ■in order to comply with the statute as to the number of corporators, but Rogan having furnished the capital became the principal stockholder, the others holding only one share each. In so far as it was practicable to do so the contract between the four was recognized and the method of conducting the business therein provided for was carried out. The business, however, proved unremunerative, and Rogan lost his money.
    It was the opinion of the court of common pleas that the sum mentioned in the twelfth clause as liquidated damages was in effect a penalty, and that inasmuch as ho proof of actual damage had been offered, the plaintiff was, entitled to nominal damages only. The jury was instructed accordingly, and a verdict for nominal damages was returned on which judgment was entered. This judgment was reversed by the circuit court and final judgment rendered for Rogan. The plaintiff in error, Doan, brings error.
    
      Mr. W. B. Neff and Mr. W. D. McTighe, for plaintiff in error.
    We contend that the contract was void for want of mutuality because at the time of its execution, the corporation which was intended to be formed was not in existence. No company exists within the meaning of the statute, until the requisite stock has been subscribed and paid in, and the directors chosen. State, ex rel., v. Insurance Co., 49 Ohio St., 440.
    It will be observed that the plaintiff in error could not possibly be compensated according to the terms of the contract unless such corporation was formed. The contract does not bind the defendant in error, Michael J. Rogan, to employ the plaintiff in error for any salary or for any length of time. It did not bind the corporation because it was not in existence. Turnpike Co. v. Coy, 13 Ohio St., 84.
    At most it is a mere offer on the part of Mr. Doan and could not become binding until accepted by the corporation. 10 Cyc., 263; 4 L. R. A., 508, note; Thompson on Corporations, Sections 480, 482, 483; 4 Am. & Eng. Ency. Law, 201; Stowe v. Flagg, 72 Ill., 397; Winters v. Mining Co., 
      57 Fed. Rep., 287; Morrison v. Mining Co., 52 Cal., 306; 7 Am. & Eng. Ency. Law, 138; Clark on Contracts, 46.
    If, however, we are wrong in this contention, we contend that the $1,000.00 was in the nature of a penalty, and the evidence showed that no substantial damage had been suffered, that therefore the common pleas court was right in holding that at most the plaintiff in error could recover nominal damages.
    It will be observed that each one of these three men was to pay the full sum of $1,000.00, although they were to be compensated in different sums for their labor and were to hold different positions. It will also be observed that if any one of them should sever his connection with the corporation even one day before the full term of three years, that he would forfeit $1,000.00. It can hardly be possible therefore to believe that the $1,000.00 was intended as liciuidated damages, that is, as having been ascertained by the parties as the probable loss which would accrue from the violation of the terms of the contract by any one of the persons mentioned, because severing his connection with the company for one day would be as complete a breach as would the severance of such connection the day after the execution of the contract. As we understand the text-books and the authorities the question as -to whether or not a sum named shall be considered liquidated damages or penalty, is to be determined by the intention of the parties which is to be gathered from the subject-matter and character of the agreement and circumstances surrounding the transaction. Berry v. Wisdom, 3 Ohio St., 243.
    If the amount named “is disproportionate to the real damage sustained, courts will hold the payment of such sums to be a penalty.” Joyce on Damages, Section 1303. If the question is doubtful, courts will hold the same to be in the nature of penalty rather than liquidated damages. Joyce on Damages, Section 1344; Blasting Co. v. Stone Co., 16 C. C., 28
    That is to- say the same amount would be forfeited whether the breach was for three days or for three years. It is absurd to assume that the parties figured out an estimate that a one or two days’ breach of the contract would involve the loss of $1,000.00 and that the loss would accrue in the one instance as in the other.
    
      Mr. Amos Burt Thompson and Mr.' Charles P. Hine, for defendant in error. -
    All the parties mutually agreed to form a partnership and eventually a corporation. Mr. Rogan agreed to furnish $5,000.00, the entire initial capital of the partnership or corporation. In consideration of such payment Roth, Mahon and the defendant Roan agreed to give their entire time to the joint business.
    There was certainly ample consideration for the several promises of the individual parties.
    We think the decision of the court in Mosier v. Parry, 60 Ohio St., 388, is conclusive against the first contention of the plaintiff in error.
    The claim that a party was not bound by a contract which provided that he should enter into a contract with a corporation not then in existence was considered by the Supreme Court of Massachusetts in the case of Drummond v. Crane, 159 Mass., 577.
    It is asserted that the contract is void because it undertakes to- bind the corporation as to how it should be organized, who should be its officers, what they shall be paid and how the affairs of the corporation should be managed. While agreements for the control of a corporation are often held invalid as against stockholders who are not parties thereto, we submit that such agreements are perfectly valid when made by all the parties who are or will be stockholders. Wilbur v. Stoepel, 82 Mich., 344.
    A mutual agreement to become shareholders in a corporation thereafter to be formed is a binding contract. Morawetz on Private Corporations, Section 50; Thompson on Private Corporations, Sections 1172 and 1181.
    An agreement defining the nature of the proposed corporation, its purposes and the details of its organization and management is perfectly proper and legitimate. Conyington on Corporate Organizations, 31; Cook on Corporations (4 ed.), 1183; King v. Barnes, 109 N. Y., 267.
    In the face of these provisions plaintiff in error contends that the partnership was not bound and “could not compensate Mr. Doan according to the terms of the contract or give him the position contemplated by the contract.” Mr. Doan could perform the work usually done by a general manager, and exercise the usual authority of such officer, whether the business was owned by a partnership or a corporation. The agreement to pay him a salary for such services was valid. 22 Am. & Eng. Ency. Law (2 ed.), 43-123.
    Plaintiff in error’s contention is that Section 12 provides for a penalty rather than for liquidated damages. We think the cases of Blasting Co. v. Stone Co., 64 Ohio St., 361, and Hattersly v. Waterville, 16 Cir. Dec., 226, 4 C. C., N. S., 242, affirmed 74 Ohio St., 466, completely refute all the arguments advanced by plaintiff in error in this connection.
    The contract uses the words “liquidated damages.” We do not claim that the use of this term in the contract is conclusive, but in the absence of any showing to the contrary the usual technical meaning will be accorded this phrase. Kelley & Mahon v. Fejervary, 111 Ia., 693.
    We believe there is no evidence whatever in the record tending to show that the parties did not intend that these words should be given their usual technical meaning.
    On the question of liquidated damages see also Sanford v. Bank, 94 Ia., 680, 63 N. W. Rep., 459; Publishing Co. v. Moore, 183 U. S., 642.
    The authorities and text-books agree that a mutual agreement to become shareholders in a corporation thereafter to be formed is a binding contract and that it is legitimate and proper in such agreement to define the purposes and details of the organization and management of the proposed cornoration. Morawetz on Corporations, Section 50; Thompson on Corporations, paragraphs 1172, 1181..
   Spear, J.

Two questions are presented, one relating to the validity of the contract and the other to the matter of damages for its breach.

The contract. It is urged as against the judgment of the circuit court that the contract lacks both consideration and mutuality and is therefore invalid. We are unable to see that either fault exists. Mutual promises, if of a substantial character, not open to the charge of illegality and involving benefit to the promisors respectively, ordinarily afford sufficient consideration for the contract of the parties. This contract on its face implies advantage to each. Rogan was to have the benefit of the skill as a salesman and the acquaintance with local trade of Doan, and Doan was to have the benefit of an advance in his compensation, and a permanent position for three years, and, although risking no money, a share in the profits. There was sufficient consideration.

The claim of want of mutuality seems to be based upon the proposition that as Doan was to be employed as treasurer and general manager of' a corporation such relation could not exist until the corporation was formed; and the promise did not bind - the corporation for it did not exist and did not bind Doan because the corporation was not bound. This assumption ignores the fact, abundantly shown by the contract, that a present partnership was formed by the contracting parties to be succeeded by a corporation within a reasonable time; that Rogan on his part was bound, as between him and Doan, and whether the anticipated corporation was also bound is not of consequence. It is not important that the contract contemplated another more formal contract, and that to be made with another party. It was well understood that Rogan was to become the owner of substantially all the stock of the Rogan company, and he did so become the owner. His interest in having the contract performed, therefore, is quite the same, in a controversy between him and Doan founded upon the contract, as though it had been provided that the business should be conducted without the substitution of a corporation.

The presence in the contract of a stipulation as to the manner of organization of the contemplated corporation, whom the officers should be and what their compensation should be, and how the business should be managed, can not have the effect to render the contract void or illegal. The corporation was to be organized for the conduct of a specific business; the parties to the contract were to have the entire control of the corporation when formed save that one share would be owned by a fifth person, this simply to make the organization conform to the statute. A contract looking to this result would not be against public policy for, as held in King v. Barnes, 109 N. Y., 267, “there is no principle of public policy which forbids competent parties from entering into an agreement to form a corporation and providing for its future management and control, if the corporation is created according to statutory requirements, and the objects contemplated are lawful and proper.” Nor is it any objection to the contract that it is a mutual agreement to become shareholders in a corporation thereafter to be formed. Such contracts are of constant occurrence and their legality is not now doubted. Indeed the organization of corporations can hardly be conveniently effected without them.

Damages. The twelfth clause of the contract is the part to which attention is directed. That is: “Twelfth: That if either Seth H. Doan, Dudley J. Mahon or Conrad Roth, shall ■ sever their connection with said temporary partnership or said corporation without the consent of Michael J. Rogan and within three years from this date the person so offending shall pay said Michael J. Rogan the sum of one thousand dollars as his liquidated damages.” There is no other act against the consequences of which as to damages there is any provision in the contract, and this fact sufficiently distinguishes this case from Berry v. Wisdom, 3 Ohio St., 241,’ much relied upon by counsel for plaintiff in error.

The practice of courts of equity, in a proper case made, even in one where the parties have used the term liquidated damages, to construe such provision as a penalty only, and then grant relief, was based upon the power of such courts to relieve against forfeitures generally, and especially for non-payment of money, for forfeitures were said to be abhorred in equity, but such practice affords no warrant for courts of law to treat as invalid a reasonable stipulation, deliberately entered into by parties in every sense sui juris, providing a certain sum as the just and appropriate amount of the damages following the breach of the agreement to do or omit to do a particular act, for to do so would be to make a new covenant for the parties, which the court may not do. And we understand the rule, generally recognized and enforced, to be that while courts will not construe contracts in a way authorizing recovery for liquidated damages simply because the parties have used that term in the agreement, yet, where parties to a contract have in terms provided that the damages of the injured party for some particular breach, or for a total breach of the contract, shall be a certain sum' specified as liquidated damages, and it .is apparent that damages for such breach would be uncertain as to amount and difficult of proof, and the contract taken as a whole is not so manifestly unreasonable and disproportioned as to justify the conclusion that it does not truly express the intention of the parties but is consistent with the conclusion that it was their intention,that damages in the amount stated should flow from such breach, it is the duty of courts of law to give effect to the plainly expressed will of the contracting parties, for as stated in Dwinel v. Brown, 54 Me., 468, quoted with approval in Knox Rock Blasting Co. v. The Grafton Stone Co., 64 Ohio St., 361: “The parties themselves best know what their expectations are in regard to the advantages of their undertaking and the damages attendant on its failure, and when they have mutually agreed on the amount of such damages in good faith and without illegality, it is as much the duty of the court to enforce that agreement as it is the other provisions of the contract.” And as held, of like tenor, in Sun P. & P. Ass’n v. Moore, 183 U. S., 642, a case involving the question of liquidated damages: “From a critical examination of all these cases and others that might be referred to, it will be found that the business of the court, in construing this clause of the agreement, as in respect to every other part thereof, is to inquire after the meaning and intent of the parties; and when that is clearly ascertained from the terms and language used, it must be carried into effect. A court of law possesses no dispensing power; it can not inquire whether the parties have acted wisely or rashly in respect to any stipulation they may have thought proper to introduce into their agreements. If they are competent to contract within the prudential rules the law has fixed as to parties, and there has been no fraud, circumvention or illegality in the case, the court is bound to enforce the agreement.” And as held, of like tenor, in Bagley v. Peddie, 16 N. Y., 469: “If independently of the stipulated damages, the damages would be .wholly uncertain and incapable of being ascertained except by conjecture, in such case the damages will be considered liquidated if they are so denominated in the instrument; if the language of the parties evince a clear and understood intention to fix the sum mentioned as liquidated damages in case of default of performance of some act agreed to be done, then the court will enforce the contract if legal in other respects.”

Without rehearsing the testimony it is made entirely clear by a consideration of the contract itself that the alleged breach by Doan would necessarily prove a serious damage to Rogan. He was made dependent almost wholly on .the other parties to the contract for the intelligent and businesslike management of the business, and especially relied upon Doan.' He was also under obligation to perform the contract with the other two contracting parties. They had left other employment and were thus dependent upon Rogan, and good faith required that he go on with the enterprise on their account. It is equally clear that the amount of such damage would be exceedingly difficult of a demonstration by proof. Nor does the stipulation seem so disproportionate to the possible damage as to justify the belief that the parties did not intend the exact result as to damages which the terms of the contract import. We are of opinion that clause twelve is not a penalty and should be construed as justifying liquidated damages.

It is insisted that it is impossible to believe the parties intended the sum named to be liquidated damages because the severing of his connection by either of the three persons mentioned three days before the contract would expire would be as complete a breach as would such' severance the day after the execution of the contract; that is, the amount would be forfeited whether the breach were for three days or three years. It would seem sufficient answer to this contention to say that the event suggested would be too improbable a contingency to cause the possibility of- its occurrence to enter into the case; at least it is not of sufficient gravity to destroy the efficacy of the provision for damages for the breach which actually did occur.

Other authorities cited by the counsel, to a greater or less extent supporting the conclusions here announced, will be found collected in their proper place.

Counsel for defendant' in error have given us as an addenda to their brief the opinion of the circuit court, by Winch, J., (not as yet published), which we have found helpful and which justifies a briefer treatment of the case by this court than might otherwise be deemed advisable.

The judgment of the circuit court reversing" that of the common pleas and rendering final judgment for Rogan will be

Affirmed.

Crew, C. J., Summers, Davis, Shaucjc and Price, JJ., concur.