Kenderdine Hydro-Carbon Fuel Co. v. Plumb

Opinion by Mr. Justice Williams, The plaintiff company, prior to the making of the contract now sued on, had an authorized capital of $50,000, divided into five hundred shares of $100 each. This was owned by three men, Kenderdine, Kitson and Weidershime. The first contributed the patent for the burners which constituted the property of the company. The second contributed services of some sort. The third contributed more services. Neither paid a farthing in money, but together they held the entire stock as fully paid, and subject to no further assessment. The only asset of any value belonging to the company was the mere right to make and sell burners. To test the value of this asset it was necessary to find some one who would furnish .the money needed for this purpose, and place the manufactured burner upon the market. Plumb, the defendant, undertook to do this. On the 6th of July, 1892, he entered into a contract with the plaintiff company, by the terms of which he was to act as treasurer and manager of the company; pay its debts not exceeding $1,000 contracted in the attempt to manufacture some of its burners ; manufacture Kenderdine burners for the company at his place of business, and furnish them to it at the actual cost of manufacture; and provide the money needed for purposes of manufacture, and the employment of salesmen to advertise and sell their burners, not to exceed $10,000, inclusive of the debts of the company he had undertaken to pay. He agreed also to employ Kenderdine at $30.00 per week, his son George at $15.00 per week, and his brother-in-law Yerkes as a salesman for not less than one half his time, paying all his traveling expenses and a suitable salary therefor. In consideration of all this he was to receive two hundred shares of the paid up stock, and the prospective dividends they could be made to yield from the profits realized by [469] sales of the burners. Under the terms of this contract Plumb began the manufacture of burners, and the effort to put them on the market and sell them to consumers. After a few months’ experiment in the business he complained to the gentlemen who composed the company that he had been deceived by them in the negotiations that led up to the contract, as to the utility and comparative value of the burners. He alleged that he had become satisfied that the patent had no real value, and that burners could not be sold in such numbers as to make the business of manufacture and sale profitable to the company or himself. He told them he had expended about $3,000 in excess of his gross receipts already, that he was ready to lose this sum, return the stock that had been transferred to him, resign his office as treasurer and manager, and go wholly out of the company and its business. This offer was not accepted. Not long thereafter Plumb discontinued the manufacture of the burners, and the employment of Kenderdine, his son, and his brother-in-law ; and the company brought this action to recover damages alleged to have been suffered by reason of Plumb’s refusal to continue the manufacture of burners under the terms of the contract of the 6th of July, 1892. Three questions were thus raised. Had Plumb the right to retire from the contract at his pleasure ? If not, did his breach of its terms inflict damage on the company plaintiff ?' The second question involves an inquiry into the commercial value of the “ Kenderdine burner.” Third, if the plaintiff is entitled to recover, what is the measure of its damage ? The terms of the written contract were indefinite as to its duration. No time was fixed at which the relation between the parties should cease. If either party desired to terminate it, if this could not be done by agreement, it was his duty to deal fairly by the other party and give a reasonable notice of his intention to withdraw from it at a fixed time. He could not abandon the joint undertaking arbitrarily, and at his own will, without an injustice to the other party, and incurring liability for at least nominal damages for the breach of his contract. Whether Plumb gave such reasonable notice of his intentions to terminate the contract relation between the plaintiff and himself was a question of fact for the jury. If they found against him on this question, then it became necessary to advance to the next inquiry, viz : did his breach of the contract [470] inflict any substantial injury on the plaintiff? This must depend on the value of the contract to the company. If the Kenderdine burner was a useful invention, having some commercial value, and able to compete successfully with the burners of other makers, in the markets, then the contract had some value to the company that owned it, and the breach of the contract providing for its manufacture and sale inflicted an injury on the company corresponding to its three fifths of the net profits to be made upon the sales. On the other hand if the invention had no commercial value, and could not be sold in the markets in sufficient quantities to make the business of its manufacture and sale a profitable one, then the contract had no actual value to the company, and its breach inflicted no substantial injuiy upon it; Kenderdine and his relatives lost employment temporarily, but the company lost nothing. It had no interest in the wages of its employees or those of Plumb, but if the business was not profitable it was interested in reducing wages and diminishing expenses. The ineome of the company was to be derived exclusively from net profits, and, if net profits were not made out of the business, the longer the work of manufacturing the burners was continued the greater would be the loss suffered by it. Whether the plaintiff, if entitled to recover, should be allowed more than nominal damages must depend on whether the manufacture and sale of the burners was, or could reasonably be made to be, a profitable business to carry on. If the jury could, on the evidence before them, find that the business would pay a net profit, then the answer to the third question is very plain. The measure of the plaintiff’s damages would be the probable profits over all expenses that would fall to it from the sale of the burners, after the reimbursement of the defendant for his advances. He had undertaken to make advances, for the purpose of testing the value of the business, up to $9,000, in addition to the payment of $1,000 indebtedness of the company. But he was to repay himself these advances out of the sales before any division of profits could be made. The contract proceeded upon the assumption that profits would be made, and to an extent sufficient to repay Plumb all advances made in developing the business before the company or its stockholders could receive anything. Did the experiment justify this as [471] sumption? The business was prosecuted by the defendant for about seven months in apparent good faith. He employed the inventor and his son in the manufacturing of the burners, and Yerkes, the brother-in-law, in the sale of them. He advanced about $3,000 above the income of the business in carrying it on; and became thoroughly satisfied, as he says, that the business could never be made to pay a profit, but that to increase his advances further was simply to increase his losses. It was at this time that he offered to return his stock, resign his connection with the company, and lose his advances. This would have left the company an opportunity to make some other arrangements for the manufacture and sale of the burners that would have produced a profit, if a profit could be obtained from the business, but this offer was declined. The company insisted that Plumb should continue to make advances up to the sum of $9,000 named in the contract whether they could be repaid or not. Worse than this, it claimed to recover as its damages the $9,000 or the unexpended balance of it, which Plumb might have lost, but not one cent of which could have gone to the company if he had continued the business. The learned judge ■ of the court below instructed the jury that this was a proper measure of the plaintiff’s damages. This was error. This $9,000 was the sum estimated to be necessary to determine whether the business could be made to pay a profit. It was to be expended in wages and materials necessary to make burners and to put them on the market in a businesslike way. If it had been actually advanced and expended and the business had continued unprofitable, not only could no part of the $9,000 have reached the company, but no profit would have been made, and the result would have been to increase the defendant’s losses from $3,000 to $9,000, for which he would have had no .recourse, except against the corporation plaintiff that was without assets, other than the patent upon its burner. The advances were the measure of the defendant’s possible loss, but under no conceivable circumstances could they become the measure of the plaintiff’s damages. The plaintiff’s loss was a loss of three fifths of the profits made out of the business, after reimbursing the advances. For seven months, and after $3,000 spent in advances, no profit was made, but the business was found to be behind by the entire amount of the money advanced.. The burner did [472] not sell as it was expected. Purchasers returned many of them, as less economical and satisfactory than other burners on the market. They were found, as it was alleged, to require more oil than was represented by the owners of the patent, and the margin between the actual cost of manufacture and the selling price was consumed in expenses and charges. To Plumb it seemed clear that the experiment had been tried sufficiently to determine that the business was a commercial failure, and that he would nob.be able to reimburse himself, to say nothing of making net profits for division. If he was right, the plaintiff had suffered no substantial loss, and was entitled at most to nominal damages. If he was wrong, the plaintiff was entitled to no more than its three fifths of what might be earned after fully reimbursing the defendant for his advances. Up to the time the business was discontinued it seems reasonably clear from the testimony that no profits were made and that the expenses exceeded the income by at least $3,000. Up to that time therefore it is not easy to see how anything more than nominal damages could have been suffered by the plaintiff, or incurred by the defendant. The question raised by the eighth assignment does not appear to have been regarded as of sufficient practical importance to receive a distinct ruling; but if this case should be tried again, and the evidence be such as to justify the submission of the point once more to the trial judge, it should be affirmed. The plaintiff can recover only nominal damages unless he can show that profits were, or ought to have been, made out of the business, and then only to the extent of what should have been received by it after the payment of advances and expenses. Although the assignments of error have not been considered seriatim, yet what has been said substantially covers the important questions raised upon this record. The judgment is reversed and a writ of venire facias de novo is awarded.