North & South Rolling Stock Co. v. O'Hara

Mr. Justice Worthington delivered the opinion op the Court. The decision of this case depends upon the construction of the contract of February 1, 1888, taken in connection with the facts of the case as they appear in evidence. Defendant in error bases his action upon the theory that plaintiff in error was in possession as a lessee with an option to buy, and that upon a failure to pay the six per cent rental when due, and to return the cars on demand, he, defendant in error, was entitled under the contract to recover the amount of rentals and the value of the cars free from any set-off or recoupment. Plaintiff denies that any rentals were due, denies that the agreement to pay rentals was in the nature of a condition subsequent, a failure to comply with which would work a forfeiture of the contract with a liability in damages to the amount of the rentals and the value of the cars; and insists that the contract was in effect a contract of sale, which plaintiff in error had ten years from February 1, 1888, to complete. And that if the rentals were due, the promise to pay was in the nature of a covenant and not a condition subsequent, the damages being not the amount of the rentals and the value of the cars, but the amount of the rentals only. We think that the contract, though called a lease, was in legal effect, as' understood and acted upon by the parties to it, a contract of sale, which plaintiff in error had ten years from-February 1,1888, to complete, and that a failure to pay the rentals when due was a breach of covenant for which defendant in error was entitled to recover only the amount of the rentals, less any balance then due plaintiff in error from defendant in error. We think, too, that defendant in error demanded more than he was entitled to demand under the contract, and his demand being inequitable, that he was in no position to declare a forfeiture. The. case is a peculiar one. In December, 1887, O’Hara and Berthold and Jennings entered into an agreement to form a corporation, to wit, plaintiff in error. They were to convey to it certain cars.that they owned and upon which there was an indebtedness. The corporation was to pay the indebtedness and take credit for the amount paid as part of the purchase price. In the case of Berthold and'Jennings, credit was to be given for all their indebtedness paid by the corporation; and in the case of O’Hara the corporation was to pay his indebtedness specified as $88,452, and to receive credit on the purchase price for $72,000 of such payment. Each individual was to subscribe equally to the capital stock, the amount of stock to be afterward agreed upon, and the three were to be sole stockholders and directors for the first year and until their successors were elected. The corporation was to start with a charge against O’Hara to the amount of the mileage earned by the cars up to December 1,1887. The total amount of indebtedness by this agreement" was fixed at $128,452, being $88,452 of O’Hara’s and $40,000 of Berthold’s and Jennings.’ The contract also provided that the $40,000 should bear seven per cent interest, which the corporation was to pay. It also provided that the amounts of payment of this sum of $128,452, with interest at six per cent from the dates of said payments, should be allowed as a credit to said corporation upon the purchase price. The object of forming this corporation was said to be “That, whereas, Henry O’Hara and the firm of Berthold & Jennings' are owners of certain railroad freight cars, as will be hereinafter specified, and are desirous of putting the same under one management and virtual ownership, for the purpose of avoiding conflicting interests, and for the better management of said property, said individuals do hereby agree to form themselves into a stock company * * * for the purpose of owning, leasing and operating railroad rolling stock and buying and selling the same, etc.” In accordance with this agreement the North and South Bolling Stock Company was formed,O’Hara,Berthold and Jennings each receiving one thousand shares of stock rated as paid up stock. O’Hara, for himself, entered into the agreement with the corporation upon which this action is based. Berthold and Jennings entered into a similar agreement on their part. As per the agreement of December, 1887, the sum of $7,693.10 was to be charged upon the books of the corporation as. a charge against O’Hara, being for mileage earned up to December 1, 1887. A charge against the corporation and in favor of O’Hara of $1,752 was to be entered, being, as is stated in the agreement, as “allowed to said party (O’Hara), in consideration of his putting in said rolling stock at par, and allowing said second party (plaintiff in error) the mileage earned during the same period of time.” It was also a part of this agreement of February 1, 1888, between the parties to this suit, that plaintiff in error should pay to O’Hara sis per cent on the difference between the value of the cars and the indebtedness mentioned, this rental to be placed on the books to the credit of O’Hara, but not to be paid until after the indebtedness assumed in the contract is liquidated and canceled. Of the $88,452 of O’Hara’s indebtedness,' when paid, $72,000 was to be charged against him on the books of plaintiff in error as part of the purchase price. It will be observed that, in the language of the contract, “it is understood and mutually agreed that there is an indebtedness on said 76 stock cars due by Henry O’Hara of $12,000, payable in notes to the order of W. Bayard Cutting, and an indebtedness of $76,452 in notes payable to the order of Post, Martin & Co., being 120 notes of $637.10 each, payable monthly.” This made a total indebtedness of $88,-452. There is nothing said about any interest to be paid upon this amount, or any part thereof. But in the contract of plaintiff in error with Berthold and Jennings it is specifically stated that interest at seven per cent was to be paid upon the $40,000 which they owed Cutting. Both contracts bear the same date. It is fair to assume", then, upon the face of the agreement, that the amount of O’Hara’s indebtedness that plaintiff in error was to pay was $88,452 without interest, the language of the contract being “the party of the second part (plaintiff in error) agrees to assume and pay the before mentioned indebtedness as they fall due amounting in all to $88,452.” But apart of this indebtedness bore interest, and plaintiff in error, in order to cancel the debt, had to pay $2,941.16 in excess of the $88,452. The debt was secured by mortgage. By the terms of the contract with O’Hara this mortgage was to be canceled. Upon payment of the debt, plaintiff in error demanded that it should be canceled. It was O’Hara’s duty, by his agreement, to see that it was canceled. Plaintiff in error, as a purchaser, or with an option to purchase under this agreement, had the right to insist that it should be canceled. O’Hara was then the first in default by not procuring it to be canceled. On December 23, 1895, the date of demand upon plaintiff in error for $12,200 rentals, there was a charge by the agreement on which this suit is based of $7,693.10 against O’Hara. Also by the same agreement and of the same date, a credit to him of $1,752, leaving a net balance charged against him óf $5,941.10. Plaintiff in error had paid for O’Hara upon his indebtedness, as shown before, $2,941.16 more than he had agreed to pay, but which had to be paid to lift the debt and leave the cars free. O’Hara, then, according to the evidence and agreement, was equitably indebted to plaintiff in error for the amount of these items, to wit, $5,941.10 plus $2,941.16, making $8,882.26. Deducting from this $1,752 charged against plaintiff in error, there was still left a balance of $7,130.26 coming from O’Hara to plaintiff in error. In what position was he then to demand $12,200 and declare a forfeiture for a failure to pay him that amount? He had failed to have the mortgage canceled as he had agreed to do, and was demanding over $7,000 more than was then due him. “The law does not favor forfeitures, and their prevention is within the protective power of equity whenever wrong and injustice will result from their enforcement.” Voris v. Renshaw, 49 Ill. 425; Hartford Fire Ins. Co. v. Walsh, 54 Ill. 164. What would be the result of holding that a forfeiture was worked by a breach of covenant to pay $12,200, even if this total amount was due when demanded! O’Hara, Berthold and Jennings, as individuals, transferred to themselves as sole stockholders in a corporation, certain cars in which they had an equity. For the amount of their respective equities the corporation was to pay six per cent as rental. What they owed upon the cars the corporation was to pay and take credit therefor as part of the purchase money. O’Hara, according' to the agreement, owed the corporation, to start with, $7,693.10. It paid his indebtedness, amounting to $91,393.16. His equity in the cars at the date of the agreement of December, 1887, was valued at $22,800. To allow him damages for a forfeiture as claimed would be to wipe out his indebtedness on the cars of $91,393.16, his debt to plaintiff in error of $7,693.16, and give him in addition a judgment, as computed by' the trial court, of $60,639.70, and an ownership of one thousand shares of paid up stock, one third of the entire property of the corporation. Courts are not inclined to construe such clauses in contracts as conditions subsequent, when such construction would divest a purchaser or a lessee of his property or estate, or subject him to inequitable damages, but rather construe them as covenants,, with damages to be assessed according to the actual injury. “Courts do not regard forfeitures with favor, and they are never enforced unless the evidence is clear that such was the intention of the parties.” The Home Ins. Co. v. Pierce, 75 Ill. 430; Gallaher v. Herbert, 117 Ill. 160; Douglas v. Ins. Co., 127 Ill. 116. The court will construe a clause as a promise or covenant rather than as a condition subsequent when a forfeiture would thereby be caused. “Mutual contracts sometimes contain a condition, the breach of which by one party permits the other to throw the contract up and consider it altogether null. Whether a provision shall have this effect, for which purpose it must be construed as an absolute condition, is sometimes a question of extreme difficulty. It is quite certain, however, that no formal words are now requisite to constitute a condition; and perhaps that no formal words will constitute a condition, if it be obvious from the whole instrument that this was not the intention or understanding of the parties. “Courts seem to agree of late that the decision must always depend upon the intention of the parties, to be collected in each particular case from the terms of the agreement itself, and from the subject-matter to which it relates. It can not depend upon any formal arrangement of words, but on the reason and sense of the thing as it is to be collected from the whole contract. It is said that when the clause in question goes to the whole of the consideration it shall be read as a condition. The meaning of this must be that if the supposed condition covers the whole ground of the contract and can not be severed from it, a breach of the condition is a breach of the whole contract which gives the other party the right of avoiding or rescinding it altogether. But when the supposed condition is distinctly separable so that much of the contract may be performed on both sides as though the condition were not there, it will be read as a stipulation, the breach of which only gives an action to the injured party.” 2 Parsons on Contracts (6 Ed.), p. 526, citing cases. “Forfeiture means the loss of something as a penalty for doing or attempting to do, or omitting to do a required act.”' 8 Am. and Eng. Ency. of Law, 443. “When the subject-matter of the contract is such that the damages for its breach can be computed by definite rules, the courts will usually treat the sum agreed upon as a penalty, especially if there is great disparity between the agreed sum and the actual damages.” 5 Am. and Eng. Ency. of Law, 25; Bishpam’s Equity (3 Ed.), 234. “It may, therefore, be laid down, as a settled rule that no other sum can be recovered under a penalty than that which shall compensate the plaintiff for his actual loss.” Sedgwick on Damages (7 Ed.), 207; Dehler v. Held, 50 Ill. 491; Scofield v. Thompkins, 95 Ill. 190; Morris v. McCoy, 7 Nev. 399; Birrenkott v. Traphagen, 39 Wis. 219. In this case the damages were easy of computation. They were the amount due at six per cent on O’Hara’s equity in the cars. The covenant to pay this rental was one of the covenants in the general agreement of minor importance, compared with the scope of the agreement, and not essential to it. The agreement upon which this action was based contains the following clause: “The party of the second part agrees to purchase said rolling stock from the party of the first part within ten years from date hereof, at the price and sum for each car hereinafter mentioned, to wit, four hundred and seven dollars and forty cents ($407.40) for each and every stock car, and four hundred and seventeen dollars and fifty-two cents ($417.52) for each and every box car, and when said party of the second part shall give notice in writing to the party of the first part of its desire to complete and consummate that part of this contract, the said party of the first part shall, on payment of any amounts found to be due him, execute a bill of sale for said rolling stock to the party of the second part.” Plaintiff in error has until February 1, 1898, to complete the purchase. The testimony shows that it is entitled to a credit of $72,000 on the purchase price, also a credit of $7,693.10. It has paid, in addition, $2,941.16 upon the indebtedness of O’Hara, thus freeing the cars conveyed by him to it from a mortgage lien. It has demanded the cancellation of the mortgage on the cars. It has also paid insurance, taxes and for repairs. Whether or not it has paid the $40,000 due from Berthold and Jennings does not appear from the evidence. But enough does appear to indicate that it is complying with its contract “to purchase said roll-' ing stock from the party of the first part within ten years from date of the agreement.” It is not entitled by said contract to a bill of sale until it has paid in full. But a bill of sale is not the sale. It is only an evidence of sale. “When the transaction between the parties is in realty and in legal effect a sale, conditioned upon the payment of the purchase price in successive installments, it can not be modified, nor its legal effect avoided, by the fact that they speak of it as a lease, and call the installments rent.” 3 Am. and Eng. Ency. of Law, 426; Hervoy v. Locomotive Works, 93 U. S. 664. For the reasons above stated, we do not think the judgment of the court is authorized, and it is therefore reversed and the case remanded.