Opinion
[Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] [Syllabus Material] Rehearing Granted 19 Cal. 219 at 240.
Appeal from the Twelfth District.
The material facts are stated in the opinion of the Court. A few are added as throwing some additional light upon the case.
Chater arrived in San Francisco, May, 1856; commenced erecting the sugar refinery in July following; and commenced putting in the machinery about August or September, 1856. The machinery was not all in, the roof of the building was not on, and the refinery was not in working order on the seventeenth day of October, 1856, when Chater was seized with paralysis, never left his house thereafter, and died in the summer or fall of 1860. It was in proof that Chater's son, who had been assisting in the erection of the refinery under the directions of his father, continued to give directions after his father's confinement to the house; that the son and defendant, Gordon, frequently consulted with Chater at his house, etc.; and after the first boiling of sugar, which was January 10th, 1857, it was shown him, and he gave directions how to improve it, etc. The son was employed in the refinery until the spring of 1858, when this suit was commenced. There was some conflict of testimony as to the capacity in which he acted: whether as superintendent, as a substitute provided by the father as the complaint avers, or as boiler, as defendants claimed, at five dollars per day.
The Court below decreed that Chater " owns and is entitled to one-third, or three hundred and thirty-three and one-third of the original shares of the capital stock" of the sugar refinery, and all " duplications, increase, profits and dividends made or accrued upon said one-third since the organization of said company; " and the company was directed to issue said stock to plaintiff, " subject to the restriction that he is not allowed to sell the said stock prior to the fourth day of April, 1861; " that the company have and receive from plaintiff for his said one-third the sum of $ 12,500, with interest from September 1st, 1856, at two per cent. per month, subject to an accounting between plaintiff and the company; that plaintiff reassign to said company so much of his stock as represents two hundred and fifty original shares, to secure the payment of said $ 12,500 and interest, to be held by the company until an account of the profits, increase and dividends upon said one-third can be stated between plaintiff and the company; and if it shall appear upon such accounting that the amount due plaintiff for the profits, increase and dividends of his one-third does not amount to said $ 12,500 and interest, it was decreed that, after applying the same to discharge: 1st, the interest as it accrued on said $ 12,500; and 2d, upon said $ 12,500, plaintiff pay the deficiency to the company; and upon such payment, the company to reassign and deliver said stock held by them as security to plaintiff; and in case the amount due plaintiff for profits, increase and dividends exceed said $ 12,500 and interest, the company to pay such excess to plaintiff. The decree closes by sending the case to a referee to take the account. Defendants appeal.
COUNSEL:
I. The company is not bound.
The second agreement of Gordon and Bond with Chater was a mere covenant on their part that the company would issue the stock on the terms agreed. The company made no agreement whatever with Chater. This could have been done in two ways: first, by a direct contract with Chater according to the tenor of his agreement with Gordon and Bond; and second, if Chater refusedto do this, by accepting an assignment of the second agreement from Gordon and Bond, as provided for in that agreement.
Neither of these things was done; and it is therefore evident that there was no privity between Chater and the company. As the company was formed, and the work of putting up the refinery actually begun, it was no doubt the intention of Chater to execute, and the company to accept the agreement as called for in the memorandum guaranteed by Gordon and Bond. The fact, however, is that nothing of the sort was done; and the company being no party to either of these agreements, is therefore discharged.
It may be objected to this, that the company was merely Gordon, Bond & Chater, and that the acts of the company in employing Chater in the construction of the building and the putting up of the machinery is a virtual acceptance and ratification of the agreement made with him by Gordon and Bond. The answer to this is, that the company represented not Gordon, Bond & Chater, but the stockholders; Gordon, Bond & Chater were to be large but not exclusive stockholders. Two hundred and fifty shares were to be retained by the company, to be sold to all buyers, and Gordonand Bond had no restriction on their power to sell out when they liked--a privilege which Bond actually exercised, for at the date of his answer he was not a stockholder. As against the stockholders, there is nothing to fix the corporation with knowledge of this agreement. The constitution is entirely silent in regard to it. For aught that appears, a majority of the stock may be held by stockholders in total ignorance of this agreement; or Chater may have offered to execute the agreement, and the company have declined to accept it. In issuing stock to Gordon and Bond, what would be the voucher of the trustees to the company? The money. In issuing stock to Chater, what would be the voucher? The agreement.
II. Chater could not demand or sue for the stock till he had first given or tendered the notes.
Gordon was to pay $ 12,500 in money for his stock, and Bond was to pay a like sum in money for his. Chater had no money, and he was to pay for his in notes; and he can therefore no more sue for the stock, without giving the notes, than Gordon and Bond could sue for theirs without paying the money. But it may be argued that this is an equity case; that a Court of Equity considersthat to be done which equity would decree to be done; and that as the agreement calls for the giving of the notes, the Court has the power to treat them as given, and decree accordingly.
The answer is, that this principle is never invoked except against a delinquent, and in favor of the justice which the delinquent withholds, and that here it would be in favor of a delinquent and against justice.
III. The rendition by Chater of his personal services to the company for five years, was the chief inducement to cede the stock, and a condition precedent to his right to it.
1. By looking at the terms of Chater's contract, it will be seen that he binds himself unconditionally to give his services to the company for five years; and if the Court shall be of opinion that the performance of this contract was part of the consideration which Chater was to pay for the stock, then the paralysis of Chater is no excuse for the nonperformance of his contract: first, because he is asking for the thing without paying the price of it; and second, because if he wished to be let off for this or any other reason, he should have put it into his contract, and thereby given to the other side achance to accept or refuse. (See Chitty on Cont. 630; 8 Term R. 267, and cases there cited.)
2. Then, was the five years' personal service a part of the consideration for the stock? This question can be resolved only by an appeal to the contract itself. This is a commercial, and not a common law instrument, and drawn by the parties themselves, and is therefore to be considered not in a literal and technical, but in a liberal and common sense spirit. (Story on Con. 673.) It recites, that " N. Chater has induced the said Bond and Gordon to enter into the organization of a company in San Francisco, for the purpose of sugar refining and its collateral branches, and the said Bond and Gordon do so on the representation of said Chater and on his promise to manage the same for five years." Here is a direct acknowledgment that Bond and Gordon agreed to organize the company on the faith of Chater's promise of service. What were the details of the organization? Each of the three were to have an equal interest. Bond and Gordon were to pay for theirs in money, and if Chater was not to pay for his by his services, then his third would be a donation, for he had nothing else to pay with. The agreementsays, the stock was to be issued to Chater on the execution of " an agreement to manage the work; " but that he was not to be considered the owner of the stock until after the full performance of their agreement, is proved by the further clause, that the stock was to be issued to him with such restrictions as should prevent him from selling it during the five years that he owed his personal services to the company, showing that his title was merely nominal, and to be controlled by the company till he had worked it out.
It is objected to this, that the agreement for the personal services is independent of the agreement for the stock, because the former were to be paid for by the company at the rate of $ 3,000 a year. The answer is, that the $ 3,000 was an additional consideration besides the stock to be given by the company for Chater's services, and prove not how little, but how much the company were willing to pay for them. If the position be true, that there is no connection between the services and the stock, and that the former were to be fully and solely paid for by the $ 3,000 a year, then the stock was not only due the day the company was organized, but Chater was to havefor nothing what Bond and Gordon were to pay $ 25,000 for.
3. Even if the Court should be of opinion that Chater has a right to the stock, it should be liable to the setoff of all damages which the company have sustained by reason of Chater's violation of his contract. The decree is absolute for the stock, takes no notice whatever of the damages sustained by the company, and treats Chater in all respects as if he were nowise in default.
IV. It is argued that the right to the stock is independent of the personal service, because it is stipulated that if Chater was discharged by the company, it was to be " without prejudice to this agreement."
This clause in the contract was intended to protect the company against an eventuality which never happened, to wit: the inefficiency or misconduct of Chater. Five years was a long time to be bound to accept the service of a man who had never been on trial for a day. The company, therefore, reserved the right, on given conditions, to discharge Chater; but the case here is, that Chater discharges himself. Having abandoned the enterprise in the beginning, and contributed to its success neither time, labor nor money, he is a strangerto its results, whether profitable or unprofitable. This reservation " without prejudice to this agreement," indicates that Chater knew the law to be as it is, namely: that if he had been discharged for incompetency, his rights would have been extinguished. It indicates also the converse rule, that if Chater discharged himself, his inchoate rights were also extinguished, and there is no reservation that his discharging himself should be " without prejudice to this agreement." Now Chater's nonperformance, although occasioned by accident, or by an act of God, over which he had no control, has the same effect as if it were willful. It is simply " nonperformance," which precludes all compensation. (Chitty on Cont. 735-736.) The act of God will sometimes shield a party from the penalty of nonperformance, where performance has become impossible by the destruction of the subject matter, or by an equivalent casualty; but never has it been held that it entitled a party to compensation in a case where performance was a condition precedent. (Chitty on Cont., ut supra, 735-736, and cases cited.)
The plaintiff's counsel have acknowledged the soundness of this position by their absurd avermentthat Alfred Chater was to be a substitute, in case of sickness, for N. Chater, the plaintiff; an averment false, disproved by Alfred Chater himself, and which, even if it had been true, they had no right to show; for the condition not being in the agreement, to establish it by parol proof would be, in effect, to make a new agreement.
For the other points of this case we refer to the brief of Mr. Patterson.
Plaintiff is not entitled to a decree for specific performance and delivery of the stock.
I. It was a condition precedent to the issuance of stock to plaintiff, that he should execute and deliver notes of $ 12,500; that he should have paid the notes May 1st, 1858, before the suit was brought. (Beem v. McKusick , 10 Cal. 540; 21 Pick. 439; Parsons on Contracts, 42, 45, and cases cited in notes; Grant v. Johnson, 1 Seld. 247; Bean v. Atwater , 4 Conn. 3; Chitty on Cont. 807, 10th Amer. Ed. by Perkins, note O.)
II. It was a condition precedent to the issuance of stock that plaintiff should render five years' services for the corporation, or should have executed a contract to do so. (McClure v. Pierce ,A. K. M. 64; 10 Cal. 573; Walker v. Jeffreys, 23 Eng. Chan. R. 348; Wright v. Howard , 1 Id. 191; Sim. & Stu. 190; Cosilake v. Still, 1 Russell, 376; 1 Ohio, 7; Colson v. Thompson, 2 Wheat. 336; Benedict v. Lynch, 1 Johns. Ch. 378; Scott v. Field, 7 Ohio; 10 Cal. 325; Brown v. Harris, 12 Ohio, 10; Milward v. Earl Thanet, cited in note 2, 5 Ves. 720; Rogers v. Saunders , 16 Me. 97; Willard's Eq. Jur. 295; Id. chap. IV, 262, 292, citing Dohret v. Rothschild, 1 Sim. & Stu. 590; 1 Eng. Ch. R. 590, argument of Pemberton, 596.)
Plaintiff's skill and knowledge of the business, his capacity (as represented by himself) to skillfully conduct sugar refining, and his agreement to do so for five years, was, (in addition to the giving of the notes) the great inducement to the formation of the joint stock company and the creation of any stock to be issued.
The failure to perform which, was a failure of the beneficial consideration upon which he was to have an interest of one-third in the corporation. His services have not been rendered, and he has in no substantial manner contributed to building up, establishing or sustaining the sugar refinery.
III. The circumstances of the case show an abandonment by the plaintiff, and the other parties, of the contracts. Plaintiff never gave his notes, has not paid the principal nor interest, and has rendered no services since the refinery went into operation. (Green v. Covillaud , 10 Cal. 317; 6 Id. 571; Pigg v. Cordier, 12 Leigh. 69; Henderson v. Hays, 2 Watts, 153; Mason v. Armitage, 13 Ves. 25; Mortlock v. Butler , 10 Id. 305; Longworth v. Taylor, 1 McLean, 394.)
IV. Plaintiff's remedy, if any, is at law and not in equity. (Cases supra .)
Bill for specific performance of a contract: 1st, to issue stock; 2d, for an account.
The main question is on the plaintiff's right to the stock. It is objected: 1st, that the giving of two notes for $ 6,250 each was a condition precedent, and that the notes have not been given.
Answer: 1st, that the notes have been given is in effect admitted in the contract; 2d, the giving of the notes by plaintiff is not a condition precedent to his right to claim the stock. True, one part of the agreement purports that the notes are to be given, and that the stock is to be issued atthe same time; but in another part, the stock is to be issued to the plaintiff on the happening of a particular event, to wit: on the execution by him of the agreement to manage the works, and that event happened on the fourth of April, 1856. 3d. It is apparent that the intention was that the issuing of the stock was to precede the giving of the notes, for how could Chater secure the notes as required unless the stock had been issued to him to begin with. 4th. The giving of the notes was matter of mere form, and did not go to the substance of the contract. a. The contract created the money liability, and if the notes had been given no new or additional money burden would have been imposed by Chater. b. The written contract creating the cash liability, and fixing the rate of interest and the time from which it was computed, and the time when the principal sums and the interest thereon were to be paid, would be as available for all the purposes of pleading and evidence as the notes. c. It was not contemplated that the principal sums should be paid except by way of dividends; and as to interest, it was expressly arranged that Bond and Gordon were to advance it to the company.
Result. The failure to give the notes when the defendants had another written security just as available; the nonpayment of the $ 12,500 when no advance of money by plaintiff was even contemplated; the nonpayment of interest when it was expressly stipulated that it was to be advanced by Bond and Gordon in the event of nonpayment by Chater; all justify the conclusion that the alleged failure to give the notes did not go essentially to the consideration of the contract. 5th. A waiver of the notes is shown by the general current of the transactions between the parties. Appellants argue that the notes should have been given at farthest by September 1st, 1856. But they kept him at work thereafter, and until he was struck with paralysis in November, and advised with him and acted under his instructions during his illness, and accepted plaintiff's son as a substitute.
Second objection. Plaintiff has forfeited all claim to stock, for the reason that he did not continue to manage for the stipulated term of five years.
Answer: 1st, he was prevented by the act of God; 2d, it is expressly stipulated that if plaintiff should be removed by the company, his removal is " to be without prejudice tothis agreement," but that " his yearly salary of $ 3,000 shall cease and determine."
Chater agreed to work for five years, and to engage in no other business. He gave the company the right to discharge him at any moment when they should choose to become " dissatisfied," and bound himself furthermore not to engage in sugar refining, either for himself or for others, when discharged. After having put himself into their power to this extent, it can hardly be supposed that he would have engaged to submit to a forfeiture of his stock as consequent upon what might be a capricious dismissal, made perhaps as the five years were about to expire. He was one of the original adventurers. The suggestion came from him. He was the only one of the three familiar with the business, and he was an expert as shown by all the proof. He was also a member of the corporation and entitled to the position of trustee. Here are of themselves grounds of title to a one-third share of the stock. The defendants' argument goes much too largely upon the assumption that Bond and Gordon were the only principals in the undertaking, and that Chater was a mere hireling working for wages. Chater was a joint principalwith them, and if he was paid a salary in addition to his share in the general venture, it was but a just acknowledgment that his brains and hands were of more value to the company than those of either or both of his associates.
Hepburn & Dwinelle, for Appellants.
Wm. H. Patterson, also for Appellants.
O. L. Shafter, for Respondent.
Heydenfeldt, also for Respondent, argued the case orally.
JUDGES: Baldwin, J. delivered the opinion of the Court. Field, C. J. and Cope, J. concurring.
OPINION
BALDWIN, Judge
Baldwin, J. delivered the opinion of the Court upon the petition for rehearing--Field, C. J. and Cope, J. concurring.
We propose to notice only two points made by the appellants on their petition for rehearing. The first is that as to the alleged error in the decree below, that Chater was entitled to three hundred and thirty-three and a third shares of the stock, when by the agreement he was only, at most, entitled to two hundred and fifty shares. As to the eighty-three and a third shares, a part of the common stock of two hundred and fifty shares, it was provided that, after being issued to the respective holders, (one-third to each) they were to be given back to the company, and sold only by a majority vote of the company, and that the shares not sold, belonging to the common stock of the company, shall, if it be not found necessary to sell them, be divided equally among the three parties, but not until the company's works have been in operation for at least twelve months. We see no evidence that these eighty-three and one-third shares of Chater were ever sold, or that there was any necessity to sell them. Indeed, they were never issued to him at all. Originally he had a right to them; but after getting the certificates he was to return them to the company--the company to hold them, and in the given event, use them to pay its debts. The decree only affirms the title of Chater to them. If on a settlement of the account it be found that Chater owed on account of his stock, or the corporation owed money for which the stock should have been sold, possibly the stock, which was designed to be security for the debts, would be in equity charged, and ordered to be so applied. That matter does not arise now on the pleadings or proofs, and we leave it open for settlement upon the final hearing, and the decree may be so reformed, if it be deemed necessary, as to reserve the question, unaffected by the decree, for disposition when all the facts can be presented.
2. It is next insisted that we erred in holding that this agreement bound the corporation. That point was barely suggested on the oral argument, and in the learned and able briefs of the counsel. No great stress seemed to be laid on it. We gave it no very elaborate consideration, for we really supposed--erroneously, perhaps--that the counsel placed but little reliance upon it. The argument now on this point is very full and very ingenious, but as applied to the facts of this record is not sound.
Every opinion, as Chief Justice Marshall well observes, must be considered with reference to the particular facts upon which it is made; for it is impossible so to use language as that general expressions apply in every instance with the same meaning to every condition of facts. We asserted no such doctrine as that, by force of a secret agreement between the original corporators in a commercial corporation, whether made before or after the Act of Incorporation, the stock issued by the corporation to innocent parties without notice of the agreement could be charged or affected by it. There was no case before us for the application of such a principle. But the right to incorporate for such a purpose as that here is a statutory right, which is free to everybody. The rights in the corporation can be adjusted by contract, and the terms fixed by contract. The corporation is little more, under our laws, than a joint stock company under the English laws; indeed, in its true nature more nearly resembling a limited partnership under special articles than a corporation at common law. This corporation was organized under an agreement, which was in itself legal and binding. The original corporators were really the men (except one--if indeed, he were not the assignee of one) who made the agreement, and were bound to execute it. They had the power to execute it; for they had on the organization the power, subject to restrictions which we do not apply here, to control their own business in their own way. A man may as well make an agreement with another for certain stock in a corporation to be organized hereafter, as an agreement for stock in a presently existing corporation. If A, B and C agree to form a corporation for a railroad with a capital of so much, to be represented by so many shares of stock, why may not they contract that each is to have so many shares on such and such terms? What rule of law forbids? Is there anything immoral in the contract, or opposed to public policy? Cannot a man as well subscribe one time as another for stock, if all interested consent? Indeed, as under this particular agreement they organized, so far as the then members are concerned, the agreement becomes as effectual as if a part of the corporate act. As there is in this respect no restriction upon the terms on which they associate or do business, or to the time of making them, why not find those terms in an antecedent agreement as well as a present adoption, if the preceding agreement is connected by clear proof with the act of incorporation and its affairs? Suppose A, B and C agree to form a corporation for running stages, and put in, each, $ 10,000, but there are to be no certificates of stock issued and no debts incurred. This agreement precedes, of course, the incorporation; and suppose the money is paid before the corporate act is consummated. The corporation is formed and proceeds to do business. Will it be contended that these men are not entitled to their respective shares of the profits, etc., from the mere fact that all this occurred before the technical, ideal thing--the corporation--was called into existence? The truth is, the corporation, under our system, following such an agreement, would be the mere agency of the associates created for the sake of convenience in carrying out the agreement, as between those who made the bargain --the different characters or forms in which or by which the bargain was made, and the order in which the several parts of it were executed, making no substantial difference in the obligation. But if it did, and this ideal thing, the corporation, be something essentially distinct and exclusive, making the men inside of it and controlling it wholly different from the same men just before they went into it; yet these shares are interests and property in esse or posse. This interest, or those shares, entitle the holder to certain privileges of value, and may entitle him to profits. Whether, therefore, the corporation is bound of itself, and as a separate entity, to recognize a right in a claimant to this interest, a private person holding these shares or interests would be bound to such claimant for them. But apart from all this, when the corporation became such, it organized with Chater, Bond and Gordon as trustees, and these were really the sole corporators also; and they organized with full knowledge of this agreement, which not only contemplated the formation of the company or corporation, but prescribed the terms and rights of the members in the corporation and corporate business. Chater was not only superintendent under this agreement, but trustee too; and the corporate business was commenced and for a long time prosecuted with reference to this agreement, which recited these terms and affirmed these rights. If anything could be, this was an adoption by the corporation of these terms. It is not necessary to inquire whether an innocent purchaser of the stock, buying subsequently without notice, would be affected by any such acts--for no such question is before us now. If the corporation be bound by this agreement, and the Court, proceeding to enforce it by ordering the issuance of stock, should affect injuriously any innocent holder of stock, it will be time enough to consider his rights, legal or equitable, when the facts and proper parties are before the Court.
If on taking the account, it should appear that Chater is not entitled to anything, but that the corporation is so indebted as to make it inequitable for him to receive his shares, the Court below, on the final hearing, can make the proper decree, unaffected by anything in the decree under review.
With these modifications, the decree is affirmed and the cause remanded.