Moore & Handley Hardware Co. v. Towers Hardware Co.

McCLELLAN, J. The equity of the bill, so far as the injunction is concerned, and the sufficiency of those of its allegations which are not denied by the answer to sustain the injunction, depend primarily on two questions: first, whether the contract relied on is void, as being in unreasonable restraint of trade; and, second, whether a negative undertaking entered into by persons who subsequently organize, and for the time constitute, a corporation for the prosecution of the business with respect to which the contract was made, can be inforced by injunction against the corporation. 1. It is insisted that the agreement of Moore, Moore & Handley, “not to handle any more plow-blades or plow-stocks,” is an unreasonable restriction on trade, in that it contains no limitation as to the place or locality at or in which they are to refrain from carrying on the specified business. It is true that such contracts must be limited as to the space they are intended to cover, or they can not be supported. [210] The meaning of a contract of this character, however, is not to be found solely from a consideration of its expressed terms. Courts look to all the circumstances surrounding the parties, and attendant upon the transaction, and from a consideration of these circumstances, in connection with the expressions of the undertaking, they will first construe the contract, and then proceed to pass upon its reasonableness as thus construed. In the case at bar, the facts were, that both parties were engaged in a certain business, in and covering that part of the State of Alabama which embraces and lies north of the city of Birmingham. It was a character of business, as conducted by them, which could reasonably and naturally be carried on throughout the territory. Over this space they wore dealing in competition with each other, and presumptively the operations of each were detrimental to the trade of the other, and the agreement of either to desist from these operations redounded to the advantage of the other. The bill alleges, and the answer does not deny, that the written agreement, copied above, was made with respect to the trade thus carried on in the territory including, and north of Birmingham, in Alabama. The contract will, therefore, be construed Avith reference to these facts, and held to mean that Moore, Moore & Handley would not handle plow-stocks and blades in competition with, or opposition to the Towers Hardware Company, within the territory covered by their previous competition, and described as that part of Alabama which includes and lies north of Birmingham. Thus construed, it becomes specific as to time, space, and character of the dealing intended to be restrained, and is reasonable and valid. —Hubbard v. Miller, 27 Mich. 15; Curtis v. Gokey, 68 N. Y. 300; Warfield v. Booth, 33 Md. 63; Dethlifs v. Tomsen, 7 Daly, 354; Beal v. Chase, 31 Mich. 490; Havner v. Graves, 7 Bing. 735; Whittaker v. Howe, 3 Beav. 383; Tallis v. Tallis, 1 El. & Bl. 391; Morse Machine Co. v. Morse, 103 Mass. 73; O. S. Nav. Co. v. Winsor, 20 Wallace, 64. 2. The general doctrine is well established, and obtains both at Hav and in equity, that a corporation is a distinct entity, to be considered separate and apart from the individuals who compose it, and is not to be affected by the personal rights, obligations and transactions of its stockholders; and this, whether said rights accrued, or obligations were incurred, before or subsequent to incorporation.—Morawetz on Priv. Corp. 227-234, 547-549; Morrison v. Gold Mt. G. [211] M. Co., 52 Cal. 309; Hawkins v. Mansfield C. M. Co., Ib. 515; Gent v. M. & Mut. Ins. Co., 107 Ill. 658; Caledonian R. Co. v. Helensburgh, 2 Macg. 391; Penn. Mat. Co. v. Hapgood, 141 Mass. 147. There is a class of contracts, however, which are entered into between the promoters or prospectors of a contemplated corporation and third persons, on the faith of the corporation, intended to enure to its benefit, and which in point of factylo enure to its benefit, on which the corporation will be charged, even in the absence of an express promise to perform, or ratification on the part of the company after it is in esse; on “the familiar principle, that one who accepts the benefit of a contract, which another volunteers to perform in his name', and on his behalf, is bound to take the burden with the benefit.” —Redfield on Railways (5th Ed.), 18; Edwards v. Grand Junc. R., 1 M. & Cr. 650; Stanley v. Birkenhead R., 9 Sim. 264; L. R. & Fet. S. R. Co. v. Perry, 37 Ark. 164; Perry v. L. R. & Fet. S. R. Co., 44 Ark. 383; Bommer v. Am. Spiral Co., 81 N. Y. 468. And in those cases where “associates combine together to create a paper corporation, to cover a partnership or joint venture, and where the stockholders are partners in intention,” and have resorted to the fiction of separate corporate entity to free themselves from individual obligations which had attached to them, with respect to the business they propose to carry on, prior to the organization of the company, courts of equity, when the ends of justice require it, will disregard and look beyond the fiction of corporate entity, and hold the corporation to a discharge of the liabilities resting on its members; and this may be done, although some of the shareholders had not originally incurred the obligation sought to be enforced, provided they had notice of it before entering the corporation, and participated in the effort to avoid it.—Davis Imp. Wrought Iron W. W. Co. v. Davis Wrought Iron W. Co., 20 Fed. Rep. 700; Beal v. Chase, 31 Mich. 490, 495, 532. The contract of Moore, Moore & Handley, sought to be enforced against the Moore & Handley Hardware Company, was not an undertaking between promotors of the company and third parties, nor made on the faith of the corporation, nor intended to enure to its benefit, nor did it enure, in point of fact, to the benefit of the corporation. It is not of that class of contracts which courts enforce against corporations, on the ground that they were made in the corporate name by [212] anticipation, and that the corporation received and accepted the benefits resulting from them. There is no allegation of fraud made against the corporation, or its shareholders, and the implication of the fraudulent effect of the corporate action complained of is denied. It is not shown that this is a mere “paper corporation,” to cover a joint venture, in which the corporators are partners in intention, and have resorted to this form for the purpose of evading and avoiding obligations which they had taken upon themselves as individuals, or for the purpose of evading the promise relied on here. If these things had appeared in the case, we should not hesitate to hold the corporation answerable for the individual obligation. But, in the absence of fraud, “no authorities have gone the length of holding that any contract made with individuals, exclusively upon individual credit, will become the contract of any future corporation that may be formed for the more convenient management and use of the benefits of it.” —L. R. & Ft. S. R. Co. Cases, supra. If the case of Beal v. Chase, supra, goes beyond this doctrine, we can not indorse it. We do not think it does. In that case, the corporation had been formed for the purpose of violating a contract not to engage in a certain business. All the corporators were held to have participated in this purpose. The business was to be conducted by the corporation, in connection with the promisor in his individual capacity. He had an interest in it, both individually and as the principal shareholder of the company; and the court enjoined the corporation, not generally, but from carrying on the business with or for the individual contracting party. To put the case at bar in line with that case, it would have to appear, not only that the corporators organized for the purpose, and with the intention of evading their contract, through the separate entity of corporate existence, but also that they reserved an interest in the business distinct from their interests as stockholders. None of these facts are shown. The effect of allowing the injunction in this case' to continue, would necessarily be to hold all future shareholders in the corporation to the performance of a contract which neither they nor the corporation had ever entered into, Í and of which they may not even have had notice. Such ar^s result could only be justified on the ground of bad faith in^y the creation of the company. To thus hamper a bona fide corporation, would be inequitable, and have the effect of [213] establishing a doctrine fraught with much danger to corporate rights, powers and property. The allegations going to show a ratification, by the corporation, of this contract of Moore, Moore & Handley, are denied by the answer, and hence can not be considered in passing on the decree overruling the motion to dissolve the injunction. Those allegations of the bill which are not denied, were not sufficient to authorize a continuance of the injunction, and the decree on that point was erroneous, and is reversed. The contract relied on here is such a one as the respondent corporation could have made under its charter. It is, therefore, one which, being already in existence between complainant and the individuals composing the defendant company, the corporation had the power to ratify and adopt. The bill, in our judgment, sufficiently avers such ratification or adoption. These allegations give equity to the bill, and the decree overruling the demurrer is affirmed. The cause will be remanded, with instructions to the chancellor to dissolve the injunction, unless the complainant amends its bill so as to entitle it to a continuance of the writ, under the principles we have announced. Beversed and remanded.