Commercial Wood & Cement Co. v. Northampton Portland Cement Co.

Houghton, J.: The defendant is a corporation organized under the laws óf the State of Delaware, and" engaged in the business of the manufacture — 389 — and sale of cement in the State of Pennsylvania, having an office in the city of New York. There were eleven directors, five of whom had been appointed an executive committee. The by-laws under which this appointment was made reads as follows: “ There shall be an executive committee consisting of five members, who shall be chosen by the directors and who shall meet whenever they see fit, or subject to the call of the chairman, or upon the written request of two of its members. A majority of the committee shall constitute a quorum. They shall have authority to exercise any powers of the board when the board is not in session, and they shall have the power to order the seal to be affixed in cases where the same may be required, subject at all times to the orders of the directors.” Amongst the members of the executive committee were -the president and general manager, neither of whom in such capacities, however, is claimed to have had the power to make the contract involved herein. The plaintiff is also a Delaware corporation, engaged in the business of marketing and selling cement,-likewise having an office in the city of New York, a very large majority of the stock of which was owned by its president, Ralph Peverly. It had a board of three directors, two of whom were its president and secretary. Dissensions had arisen amongst the stockholders and directors of the defendant, particularly with respect to changing the sales agent of the company, which culminated in the calling on the 25th day of June,-1901, of a meeting of the stockholders' at Dover, Del., for the twenty-eighth day of June instant, for the purpose of amending the by-laws so as to increase the number of directors, and to give the board of directors power to remove any member of the executive committee when it was thought to be for the best interests of the corporation. The president of the plaintiff was on friendly terms with the president and the general manager of the defendant, and they had been negotiating with him for some time prior to June twenty-fifth respecting a contract with the plaintiff to act as sales agent for the defendant, and by their direction the president of the plaintiff had prepared the contract in controversy. There had been a meeting of four members of the executive committee on the twenty-fifth of June, two of whom opposed this — 390 — ■ plan,, but no mention was made of the proposed" contract.. • A meet- ' ing of the full board of directors had been called for June twenty-seventh at two p. m. On the twenty sixth the chairman of the executive committee of defendant informed tliQ president of plaintiff that the contract should be signed, and. Was informed that the plaintiff’s secretary Could be- gotten. from Philadelphia, where he then was, in the morning. Thereupon a call Was issued for a meeting of the executive committee of the defendant on the .twenty-., seventh oí Juné at ten ■ o’clock a. m.¿ at which meeting, three members being present, a resolution was passed directing the execution of the contract in controversy, and it was thereupon signed by both parties, with’the seals of the two corporations attached. In substance, the contract provides that the plaintiff should. be ■the sole selling agent of the entire output of cement of. the defendant for the period , of five years, or in default of notice of termination for -five years more, and receive a commission of-six per cent on all sales, whether made by it or others, payable "on the . fifteenth day of the month following shipments; the defendant to fix’ the terms of sale and.’a minimum price, which should not be changed except on thirty days’ notice, and which minimum should be binding on all proposals for the furnishing of cement made by the plaintiff prior to such notice, defendant to pay for all advertisements,. of which, however, plaintiff was to have charge. The plaintiff did not agree, except by such implication as the law might raise,, to make any sales or endeavor to' make, any, and specifically bound itself to do nothing except to- keep a set of books in. the name, of defendant, showing sales and credits, and to make remittance of receipts, and to maintain a suitable office, separately or in connection with "its own- general offices, and to pay any clerks, bookkeepers, salesmen or stenographers which 'it might employ in such office, and all postage and express charges on advertising matter which it might distribute. Certain other details of conduct are specified, which are not material; and a further clause provided that if at any time during the continuance of the contract a change in the management of the defendant corporation should take place, the - plaintiff’s rights under the contract should be preserved. - A copy of this contract was transmitted to the board, of directors, which met within two hours after -it was. executed1, and they passed — 391 — a resolution notifying the plaintiff to take no action and incur no expense under it until it should be further considered and ratified or rejected, which resolution was at once transmitted by telephone and messenger to plaintiff. The president and the general manager, who had been instrumental in'the execution of the contract, wei;e summarily removed from office and from the executive committee, and, on the seventeenth of September following, the board of directors of defendant formally rejected and repudiated the contract and so notified the plaintiff.1 The plaintiff, in pursuance of the contract, wrote some letters and sent some orders, which' were rejected before the contract was ' formally repudiatéd, and in May, 1902, this action was brought for damages, and the plaintiff proved that its commissions of six percent on the amount of defendant’s sales up to- October, 1905, amounted to the sum of $90,590.10, from which it conceded should be deducted expenditures which would, have b ;en incurred had it carried out the contract of $2,700 per year. At the close of all the evidence the court dismissed the plaintiff’s complaint, and, we think, properly. . Notwithstanding the. hurried and surreptitious manner in which the contract was executed, if its validity depended upon bad faith or fraud that question would be for the jury to determine and not for the court. We think, however, the contract was unreasonable and one not within the power of the executive committee to make, because it was not within the contemplation of the by-law creating such committee.. It certainly was an extraordinary contract for an . executive committee to make during the last hours of its existence. It was one involving serious consideration and careful discretion on , the part of the managers of the corporation and one which as a business proposition, if made at all, should have been made by the board of directors themselves. The laws of the State of Delaware,* which were proven, provide that the business of every corporation shall be managed by a board of directors whose term of office shall be one year, unless they shall be divided into classes," which was not done in the case of defend — 392 — ant. The term of office of the board of directors, therefore, was ' for one year only. The term of the contract extended far beyond the life of the executive-committee as well as that of,the board of directors which created it. . The by-law giving authority to the executive committee to exercise any powers of the board of directors when not in session, must be construed to relate to such ordinary and administrative business of the corporation as from time- to time might arise during, the term of office of the directors themselves. It cannot be presumed that the board intended to delegate to an executive committee the making of a contract which would tie the hands not only of the present but future directors. In construing the action of the board of directors in adopting a by-law conferring powers upon executive officers or committees, it must be assumed that they had in mind the provisions of the statute fixing their own terms of office, and that, at the expiration of that period, other persons might be chosen upon whom would rest the responsibility of the conduct and management of the business of the corporation, and that they had no right- to interfere with the powers of future boards by imposing upon them unreasonable contracts, and such provision of the statute may propeily be taken into consideration by the court in determining whether the contract is reasonable or unreasonable. (Carney v. N. Y. Life Ins. Co., 162 N. Y. 453 ; Caldwell v. Mutual Reserve Fund Life Assn., 53 App. Div. 245.) The executive committee had only such powers as were conferred upon it. They. were not officers of the company having inherent and executive authority to contract concerning and conduct and manage the corporate business. The plaintiff was. not dealing with the president and general manager as such, and was not lured into the contract by any apparent authority which they as such officers possessed. Its president was informed that the executive committee must meet and that it would meet and take action upon the contract, after which it would be executed. The dealing was, there-, fore, with the executive committee, an artificial creation of the corporation, and plaintiff was bound T5y such authority as it had. (Alexander v. Cauldwell, 83 N. Y. 480.) ' ... In our opinion it did not have authority to make the contract which it assumed to make and the defendant was not bound by it. — 393 — The unreasonableness of the contract is shown by the plaintiffs own proof, which, discloses an income to it of more than $20,000 per' annum for an expenditure of $2,700. There may be doubt that even the board of directors had the right to enter into any such contract, but in our view of the case it is unnecessary to determine that question. It is urged that the coni,-act lacks mutuality in that the plaintiff did not covenant to make any sales or to use its best endeavors so to do. Whether a covenant will be read into a contract where there is no express agreement to perform depends upon the intent of the parties gathered from the instrument and the surrounding circumstances. (Booth v. Cleveland Mill Co., 74 N. Y. 15; Wells v. Alexandre, 130 id. 642; Jacquin v. Boutard, 89 Hun,. 437; Horton v. Hall & Clark Mfg. Co., 94 App. Div. 404.) The plaintiff held agencies for other cement companies and maintained an office for the purpose of selling'cement. The contract specifies certain thing's which it shall do and may do, but nowhere provides that it shall make any effort to sell the cement of the defendant. We are inclined to the opinion that a covenant to use best endeavors to sell may be read into the contract, but our view of the contract itself and lack of authority on the part of the executive committee to enter into it renders a determination of that question unnecessary. Our conclusion is that the judgment is right and should be affirmed. Footnotes [*] See Gen. Corp. Law (Laws of Del. of 1901, chap. 167), § 9. This statute has been since l-e-enacted. (See Gen. Corp. Law [Laws of. Del. of 1903, chap. 394], § 9).— [Rep.