Case Name: McCauley v. Arkansas Rice Growers' Cooperative Association
Court: Arkansas Supreme Court
Jurisdiction: Arkansas
Decision Date: 1926-10-11
Citations: 171 Ark. 1155
Docket Number: 
Parties: McCauley v. Arkansas Rice Growers’ Cooperative Association.
Judges: 
Reporter: Arkansas Reports
Volume: 171
Pages: 1155–1176

Head Matter:
McCauley v. Arkansas Rice Growers’ Cooperative Association.
Opinion delivered October 11, 1926.
Charles A. Walls and George C. Lewis, for appellant.
Joe T. Robinson, A. G. Meehan, C. E. Pettit and W. A. Leach, for appellee.

Opinion:
Hart, J.,
(after stating the facts). At the outset, it may be stated that the validity of contracts under our Cooperative Marketing Act was sustained in the Arkansas Cotton Growers' Cooperative Association v. Brown, 168 Ark. 504, 270 S. W. 946, and it was held that equity has jurisdiction to grant relief where legal remedies are inadequate. In addition to the authorities cited in the opinion and by the reporter in a footnote, we refer to the case-notes in 25 A. L. R. 1113 and 33 A. L. R. 247, for a full discussion and review of the decisions of the various courts of the different States on the subject of cooperative marketing of farm products by producers' associations.
In Brown v. Staple Cotton Cooperative Association, 132 Miss. 859, 96 So. 849, the validity of contracts of a cotton growers' cooperative association was upheld, where its'declared purpose was to promote, handle and encourage the marketing of cotton intelligently, minimizing speculation and stabilizing the market. ' The court said:
"The plan of appellee association, considered in connection with the marketing and association contracts between appellee and its members, does not undertake to fix prices of long staple cotton. The outstanding purpose is to promote intelligent warehousing and marketing of such cotton. Appellee association goes out in the open market and hunts purchasers who compete against each other. It is simply a sales agency or a plan for group marketing. It is true it has large powers, but not even all the power at one end of the bargain. One of the main purposes is to prevent long staple cotton growers from being forced, on account of their financial necessities, to dump their cotton on the market for the producer the year round, instead of for only three or four months. Another object is to save expense to the producer by means of having large quantities of long staple cotton stored, classed,'and marketed by appellee association, instead of by thousands of producers, who know nothing about classing cotton. Appellee association, under the arrangement, is able to sell direct to the mills as well as to others. ' '
In all the cases cited and referred to, it is recognized that the purpose of such associations is to secure for their members the advantages of cooperative bargaining in selling their crops. It has been well said that such associations, wisely and economically administered, tend to work to the advantage of the producers, and that the pooling arrangement tends to stabilize prices, and, in the long run, to secure to the members better prices by affording them better and cheaper warehouse facilities and by enabling them, when necessary, to sell direct to the manufacturers. Again, the associations enable them to sell in larger markets, extending over a much longer period of time and a greater area of territory. It was found out that, individually, the producers could not dispose of their crops at a fair and reasonable price. Those in debt were forced to sell, as fast as their crops were gathered, to local buyers. All were forced to sell in the local markets and to store their products in warehouses furnished by prospective buyers. The buyers, by combining, might practically eliminate competition and thus greatly depreciate the market value of the crops. Single-handed, the producers could not successfully combat this evil; collectively, the producers, by pooling their products and placing them in the hands of a selling agency selected by themselves, might obtain better prices. By acting together, they could greatly lessen the cost of storing their products until ready to sell and could greatly lessen the cost of sale by using the same selling agencies, and could ¡better secure competitive bidders by being able to sell in larger or smaller quantities, at tbeir option, through the same selling agency.
' The decisions in the cases cited and referred to above recognize that, in construing contracts of this kind, the existing conditions and the situations of the producers must be considered. This is merely an application of the general rule of construction in ordinary contracts. It is a cardinal rule of construction that the meaning of a contract is to be gathered from the instrument as a whole, and, in construing a contract, words should be given their usual and ordinary meaning when this can be done.
It is also a fundamental rule of construction that courts may acquaint themselves with existing conditions and place themselves in the same situation as the parties to the contract, so as to view the attendant circumstances as they viewed them, in order to ascertain the intention of the parties from the- language used in the contract. United States Fidelity & Guaranty Co. v. Sellers, 160 Ark. 599, 255 S. W. 26; Alf Bennett Lbr. Co. v. Walnut Lake Cypress Co., 105 Ark. 421, 151 S. W. 275; and Arlington Hotel Co. v. Rector, 124 Ark. 90, 186 S. W. 622.
The chancellor found that there had been certain breaches of the marketing contract by the officers of the association, but that the violations of the contract were due to a mistaken or wrongful construction of the contract. The chancellor was of the opinion that any wrong done the members could be corrected by a restatement of the accounts, and that a violation by the officers did not relieve the members from a further compliance with their contracts to deliver their rice to the association, nor did the wrongs justify the appointment of a receiver.
Counsel for appellants contend that this rule is wrong; they quote the well-established rule that the one who first breaks a contract cannot maintain a suit to recover upon it, and that the failure of one party to comply with the contract releases the other party from per formance. Jerome Hardwood Lumber Co. v. Beaumont Lumber Co., 157 Ark. 220, 247 S. W. 1059, and cases cited.
The reason for the rule is that, where covenants are mutual and dependent, the failure of one party to perform absolves the other and authorizes him to rescind the contract. Emigrant Co. v. County of Adams, 100 U. S. 61.
There are certain well-known exceptions to the general rule, and one of them' is the effect of a' failure to perform an independent covenant. In 5 Page on Contracts, § 2976, the rule is stated as follows: "From the nature of the independent covenant, the essential characteristic of which is that the parties intend that the performance thereof shall not depend upon the performance of the adversary party, it follows that the breach or nonperformance of such covenant does not operate as a discharge of the covenants which, by the terms of the contract, are to be performed by the adversary party. If such independent covenant is broken, the adversary party has a right of action for damages thereon, but he cannot treat such breach as a discharge. ' '
In Taylor v. Patterson, 3 Ark. 238, it was held that, in the case of independent covenants, either party may recover damages for a breach of the covenant in his favor, and the nonperformance of one is no excuse for the other. See also Desha v. Robinson, 17 Ark. 228, at 243.
In principle, the effect of the failure of the association to'perform certain covenants of the contract is no wise different from the failure to perform an independent covenant.
As will appear from our statement of facts, both the statute and the contract provide for an injunction to prevent a breach, and for liquidated damages in compensation therefor.
The services of the association in pooling and marketing the rice of its members were to be furnished continuously during the life of the contract. Bach season's business was separate and distinct. Manifestly, each member signed the contract upon the faith of the signature of the other members.
Appellee has no capital stock, and is not operated for profit. The association is not allowed to purchase, handle and sell rice, except for its members. It is dependent f.or its existence and an opportunity to serve its members upon their observance of their contracts and upon the continued existence of the association. Members join' the association for a stated number of years, and are permitted to cease growing rice at any time they see fit to do so. New members are being admitted year by year. The purposes of the association are fully set out above, and need not be recited here. In consideration of the members' promises-in signing the "marketing contract," the association agrees specifically to receive, handle and market the rice .of its members and to settle therefor according to specified terms.
Appellants signed the "marketing contract" with the other members of the association. Hence appellants' agreements were made in consideration of like agreements of the other members and for their mutual advantage. If appellants could be absolved from the performance of the contract because the officers of the association had committed breaches of the contract in certain respects, it is certain that the other members of the association would suffer by this course. The action of the appellants in rescinding the contract would tend to cripple the association and thereby harm the other members of it.
To illustrate, if a sufficient number had joined in this suit, and it should be held that they were released from a performance of the contract because of the breaches committed by the officers, this might result in destroying the association and in depriving those remaining in it of the advantages all members expected from joining the association. It will be noted that the members of the association joined for a specified number of years, and doubtless in the expectation that all thp members would remain in the association for the specified time.'
The "marketing agreement" contains a clause that a member may cease to grow rice at any time while a member of the association. It is fairly deducible from the entire contract that it was contemplated between the parties that all the members who did grow rice should deliver it to the association to be marketed,, during the period of time provided for in the contract. Under these circumstances, we think the chancellor was right in holding that the breaches of contract' in this case, on the part of the officers of the association, did not absolve the members from delivering their rice to the association to be marketed during the period of time stipulated in their contracts.
This question has not been directly passed upon by this court or by any other court of last resort to which our attention has been called, but we think our present holding is in accordance with the principles of law laid down in cases of this sort cited above. Any other rule would certainly impair the usefulness of such associations, if it did not wholly defeat their purpose and destroy them. It will be noted that, in construing similar contracts, it has been held that, while the contract was one which could not be specifically enforced in equity because such course would require the performance of continuous duties, still this did not prevent the courts from entering injunctions restraining its ¡breaches, which indirectly accomplish the same result. . In addition. to the cases above citéd, see Pratt v. McCoy, 128 La. 570, 54 So. 1012.
It follows that the chancellor's holding on this branch of the case was correct.
The chancellor held that the reserve of two per cent., deducted each year for credits and general purposes, can be used to pay only contingent expenses of the crop for which it is collected, and must, after the contingent expenses of that season are paid, be returned to the members who paid, in proportion as they paid it. The chancellor, however, held that the unexpended balance of this reserve cannot be returned to the members until the season's business has been entirely disposed of.
Counsel for appellee challenge the correctness of this holding and contend that the reserve should be construed as a permanent continuing fund and corporate asset. They insist that such construction is necessary to make the association a complete workable organization.
The correctness of the holding of the chancellor depénds upon the construction to be placed upon article 6 of the "marketing agreement," which is set out in our statement of facts, and need not be repeated here; The majority of the court is of the opinion that the contention of counsel for appellee should be sustained.
Bearing in mind the general rule for the construction of contracts above announced, we all agree that the intention of the parties should be gathered from the language used as a whole, and that the paragraph should be read in connection with the remainder of the contract ánd in the light of the situation of the parties when the contract was executed. Each member signing the contract agrees to be bound by its terms for a designated number of years. Members may cease to grow rice during a particular year or years during the life of the contract. New members are constantly coming in. The success of the association in accomplishing the purpose of its organization depends upon its continued existence. The accumulation of a .moderate reserve will enable the' directors to have at their disposal a sum to be used whenever occasions of sufficient urgency arise. It is pointed out that this is the usual practice in commercial undertakings, and it is equally desirable in cooperative ventures.
That this meaning was intended is shown by the clause "and of reserves for credits and other general purposes." It is said that this language, when read in connection with the context, evinces an intention on the part of the parties to the contract that the officers of the association should retain out of-each year's operations a certain percentage to be set aside as a surplus or reserve fund to be used in case of need.
Such is the line of reasoning made by counsel for the association and adopted by the majority of the court. It is said that the words "annual surplus," used in the last sentence of paragraph 6, is not the unused portion of the reserve but is the sum remaining after all deductions have been made.-
On the other hand, Judge-Humphreys and I think the 'better view of the matter is that urged by counsel for appellants and adopted by the chancellor. We think the language used clearly indicates that each season's pool was to take care of itself, and that it means that the reserve belongs -to the members who contribute' it, and any surplus remaining after the close of the season's business must be distributed to them.- We think the words "annual surplus" refers to a sum to be kept by'the association, after the sale of the rice and the payment of the proceeds -of sale to the rice growers, until the final close -of the season, in order to meet unforeseen liabilities which might arise from the conduct of that year's business.
As stated by counsel for appellants, the evident purpose of the contract as a whole is that the' association shall sell the rice of its members as cheaply and expeditiously as practicable and pay the proceeds to its members, and that the "annual surplus" was to meet unforeseen liabilities for the current year and not as a reserve fund for future years. •
"In this connection we may say that we all agree that, if-the directors of the association should undertake to reserve an amount greater than appeared -to be reasonably necessary to meet unforeseen emergencies, the members -might enjoin them from collecting more than appeared to be reasonably necessary for' an economical administration of the- affairs of -the association.
It results from -the view of the majority that, the use of the reserve provided for in article 6 of the "marketing agreement" is not limited to the year's business in which • it is collected, and that an annual distribution thereof is not required.
The chancellor held that the method of pooling rice in the clean adopted by the association was warranted under the terms of the "marketing agreement." It was the contention of counsel for appellants that the contract means that the rice should be pooled in the rough. According to the view of the- association, a pool constitutes a volume of rice of a given quality, variety and grade, handled throughout the season, and its practice in pooling clean rice was to put rice of like variety, grade and quality into one pool, each pool to be for the full season. It will be noted that articles ,5-, 6, 7 and 8 all deal expressly with the question of pooling and selling the rice of the members, and the correctness of the court's ruling depends .mainly upon the interpretation to be given these articles.
Articles 5 provides that the association shall pool or mingle the rice of the growers with that of a like variety,, grade and quality delivered by other growers. It also provides that the grading or classification of the association shall be conclusive.
Article 6 provides for the resale of such rice by the association, together with rice of like variety, grade and quality, delivered by other growers, for the best price obtainable.
Article 7 provides that the grower agrees that the association may handle, in its discretion, some of the rice in one way and some in another; may sell some in the rough or otherwise; may contract for or effect the milling of all or any part thereof, and sell the finished product to the trade or otherwise.
Article 8 provides that the association may sell the rice within or without the State, directly to millers or brokers or the trade, or to the public, or otherwise. This article provides that the association may sell all or any part of the rice, to or through any agencies, now or hereafter established, for the coope'rativé marketing of the rice of growers in 'other States throughout the United States. '
Thus it will be seen that the largest discretion in the premises is given the association. The contract not only does not by implication or otherwise restrict or limit the' powers of the association to grading and selling the rice in the rough, but, by necessary implication, as well as by express language, gives the association the authority to sell rice either in the rough or after it has been cleaned or run through the mill.
When the contract provides that the association may effect the milling of all or any of the rice and sell the finished product to the trade or otherwise, this would seem to confer'express authority to form a pool of the rice in the clean.
Again, the contract gives the association the authority to sell the rice to or through any agency established or to be established in any other State for cooperative marketing. It is a matter of common knowledge that this could not be as successfully done if the rice was to be pooled in the rough. In such state, it might not be practicable to ship it to a selling agency or purchaser in another State.
For these and other reasons which might be given, we are of the opinion that the holding of the chancellor, that the association was given the authority in the contract to pool the rice in the clean, was correct.
The chancellor correctly held that the association could not purchase rice at all, whether mortgaged or not, and that the purchase of mortgaged rice in 1923-24 was a violation of its contract with its members. The correctness of his decision on this branch of the case is apparent when the "marketing agreement" is read in connection with the act authorizing cooperative marketing associations. As we have already seen, similar acts authorizing pools of farm products have uniformly been upheld by the courts of last resort of numerous States, as against various constitutional objections, and as not being monopolies or contracts in restraint of trade.
Under the articles of incorporation of the association, which followed the terms of the act under which it was organized, the association was organized for the purpose of pooling and selling the rice grown by its members, and no person was eligible to membership except rice growers. The articles of incorporation do not contemplate that the scope and purpose of the association could be so extended a» to become a business corporation conducted for profit. The act authorizihg the incorporation of the association contemplates that the association may only make contracts to pool and sell the product of its members. The "marketing agreement" by its terms follows the statute, and does not contemplate that the association should purchase rice from any person or persons at all.
The contract also expressly provides that the association may make advances to its members under certain stipulated terms or conditions. In carrying out the power thus conferred, the chancellor properly held that the association might pay off a mortgage, when, in good faith, it believed the value of the rice to exceed the mortgage, and take the mortgaged rice upon the same terms and conditions as the rice of other members. It was also rightly held that, if the rice was sold for less than the amount of the mortgage, the loss must be borne by the mortgagor. In this connection it may also be stated that the chancellor properly held that, in making advances, the association should do so to all the members at the same percentage, or, if this was not done, the member should pay interest on the amount of advances received.
On the subject of the appointment of a receiver but little need be said. As we have already seen, it is conceded that the finding of facts made by the chancellor is sustained by the evidence in the record. The chancellor held that the facts did not show such fraud and .mismanagement of the affairs of the association as would justify the appointment of a receiver. The court expressly found that the cost of milling the rice was not shown to be excessive under the existing conditions, and that the directors did not abuse their discretion in the payment of attorneys' fees and salaries to officers and employees.
The general rule- is that courts proceed with great caution in the appointment of receivers to take charge of the affairs of a corporation, for the reason that such action amounts to a practical displacement of the directors in managing the affairs of the corporation. It may also he said that the rule is not to appoint á receiver when the specified acts complained of may be remedied by injunction or are capable of redress by othér available means. Hence the chancellor did not err in refusing to .appoint a receiver.
The chancellor correctly held that the $54,872.69 which was deducted by the association from the first year's milling and storing rice, was wrongfully deducted and spread over the five-year period of contract remaining. During the first year of its operation the association handled rice for persons who were not members as well as for those who were members. It sold a large amount of rough rice, which was not pooled, on which it charged a commission- of 10 per cent. As we have already seen, the association had no right to handle the rice of persons who were not members of the association, and no right to sell rough'rice without pooling it, and no fight to sell rice on commission.
These matters were all foreign to the object and purposes of the association, and were extremely hazardous. Such a course of conduct, if pursued, would ultimately tend to defeat the purpose of the organization, which was cooperative marketing, and might destroy the organization. Any member of the association could have obtained an injunction stopping it. ' Such a course of conducting the business of the association did not result in a loss to the members, and, as a necessary consequence, no damage was suffered. Indeed, this particular transaction resulted profitably to the association, and, in the final settlement of the season's business, $54,872.69 was on hand to be distributed. As we have already seen, the contract does not contemplate that there should be an accumulation of a surplus fund, except the reserve fund provided for in article 6 of the contract, as pointed out in the opinion. In other respects, the proceeds of sale at the close of the season, and, in this particular instance, the profits-made, are to be shared by the members of that season, and are not to be carried forward into succeeding years and spread over the remaining five-year period-of the contract and distributed accordingly.
Complaint is made that the chancellor taxes the costs against the association. In equity, the granting of costs rests entirely within the discretion of the court. The principle which should guide the discretion is that the party who, by his fault, has unnecessarily involved another in litigation, should pay the cost thereof; and it does not always follow that the unsuccessful party was at fault, or that the litigation was unnecessary.
In the case at bar the chancellor found that the association had breached its contract with its members in several important respects, and only denied them the relief asked for by them. Considering the matter in all its aspects in connection with the attendant circumstances, we cannot say that there is a plain case of an abuse of discretion in the chancellor 's allowance of costs. Temple v. Lawson, 19 Ark. 148; and Penix v. Pumphrey, 125 Ark. 332, 188 S. W. 816.
The costs upon the appeal stand on a different footing. The decision of the chancellor in the main has been affirmed. The reversal of the chancery court as to the disposition of the reserve fund inures to the benefit of appellee. Under all the circumstances,' the appellee will be allowed to recover the costs of the appeal.
As stated by the chancellor, counsel on both sides have clearly and, with as much conciseness as practicable, presented the issues, and we could do little except adopt their reasoning, which we conceive to be just and plainly warranted by the "marketing agreement, ' ' when read and interpreted in connection with the articles of incorpora tion and the statute under which they were authorized. The result of our views is that the finding of the chancellor was correct, except as to his holding on the reserve fund, as indicated in the opinion.
It follows that the decree will be reversed, and the cause remanded ydth directions to the chancery court to hold the reserve fund to be a continuous permanent fund of the association, as held in this opinion. In all other respects the decree will be affirmed.