
    UNFAIR. CONTRACT BETWEEN A BOARD OF DIRECTORS AND SOME OF ITS MEMBERS.
    [Circuit Court of Hamilton County.]
    The United States Board & Paper Company v. Wallace F. Browne et al.
    Decided, July, 1903.
    
      Special Charges — Must he Given Before Argument When Requested— Interest of Directors Antagonistic to That of the Company — Contract with, Unfair to the Company May he Set Aside — Good Faith as Distinguished from Unerring Judgment — Ratification—Commissions and Discounts.
    
    1. It is not a matter of discretion, for the court to withhold until after argument to the jury the giving of such written propositions as are requested and properly state the law applicable to the case; such propositions should be given before argument, and refusal to so give them is ground for reversal.
    2. Where the hoard of directors of a mill property enter into a contract with a selling agency for the disposal of the product of the mill, and some of the directors are interested in this agency, and thus make a profit which might and should have gone to the company, and the efforts of such directors are in the interest of the agency as against the interest of the corporation, such conduct constitutes a sufficient ground for the cancellation of the contract by the company.
    Marvin, J.; Swing, J., and Mooney, J., concur.
    Error flo court of common pleas.
   The parties here are the reverse of what they ivere in the court of common pleas; they will, however, be spoken of in this opinion as they stood in the. original action.

The original plaintiffs were Wallace F. Browne and Wm. A. Stuart, doing business as a co-partnership under the firm name of Browne & Stuart.

Before the last trial id the court of common pleas, the plaintiff, Wallace F. Browne, died and H. C. Yeiser, as administrator of the estate, was made a party in his stead.

The defendant is a corporation organized under the laws of the state of Indiana. The first trial of the ease was to the court, a juiy having bee© waived, and resulted in a judgment' for the defendant. This judgment was reversed by this court and the case remanded to the court of common pleas. The case was then tried in that court to a jury, resulting in a verdict and judgment for tire plaintiffs.

By proper proceedings this last judgment is 'here for review. A bill of exceptions showing the proceedings upon the trial, including all the evidence, is filed here.

The issues upon the last trial differed somewhat from the issues as they were in the first trial, such difference resulting from an amended answer filed in the case and a reply filed thereto.

The plaintiffs claim that the defendant was a manufacturer of straw boiard for use in making paper boxes; that on the 19th day of December, 1896, defendant entered into a contract with plaintiff®, by which plaintiffs were to act as the selling agents of the defendant for one year from that date, and the defendant agreed to pay plaintiffs for services, as such agents, a commission of 7 per cant, on the sale of all goods sold by them. Plaintiffs undertook the performance of the contract on their part, and acted as such selling agents up to the 26th .’day of April, 1897, when they were discharged from such employment; plaintiffs say they have been ready, able and willing to perform all the conditions of said contract to he performed by them, but they have been prevented from doing anything thereunder since April 26th, 1897, and pray for damages.

The defendant says that whatever contract was made with the plaintiffs was the adoption of a resolution by its hoard of directors, on the 19th day of December, 1896, which was in these vrords:

“Be it Resolved, That we employ Browne & Stuart as selling agents for the company for one year, at a commission of 7 per cent., all sales being subject to the usual cash discount o-f 3 per cent., that is, in 10 days from the date of shipment, and all payments to be made in cash.”

At the time of the adoption of this resolution .the plaintiff, Wallace F. Browne, was one of the board/ of directors of the defendant; the other members being Charles W. Bell, H. C. Yeiser, Jackson H. Dnnoain and Henry M. Wrigiley. The said Charles W. Bell was an employe of the plaintiffs, Browne & Stuart.

It is alleged on the part of the defendant that Browne & Stuart, Yeiser aud Bell conspired together to have said resolution adopted for the purpose of giving to- said Browne & Stu'art the contract to act as selling agents of the defendant' for a compensation much greater than should have been paid to them, and that but for the votes of said Browne, Bell and Yeiser, said resolution would not, and could not, have been adopted; that' they, the three last-named, all voted for it; that said Browne was president of the defendant company, and that said Yeiser was an intimate; confidential friend of both said Browne and Stuart; that said Bell made a contract with said Browne & Stuart, whereby he was to act for and with them in the sale of the product of the factory of said defendant," and to receive for his services one-half of the profits of the sale of said product provided for in said resolution to be paid to s'aid Browne & Stuart; that the stockholders of said defendant company were ignorant -of the terms of the resolution hereinbefore quoted, and of the fact that any such contract had been made with said Browne & Stuart.

The answer further avers that said Browne & Stuart and Bell were promoters of said defendant company, and brought about its organization, and that it was supposed by the other directors that this contract was in. part made as payment for their services in bringing about the organisation of said corporation.

It is further averred that said Bell was the managing agent of the defendant company, and that said Browne & Stuart were to pay him in full for bis services as such managing director out of the profits-which they should make under said resolution; that the corporation was organized by the stockholders for the reason that most of them were consumers' of straw board such as- was to be manufactured by the defendant, and that the price at which such straw board was sold in the market was much higher tb-a.n it could be produced for, amid the design and purpose was to- organize the defendant' and produce the straw board and furnish it to the stockholders at a reasonable price — much less than the market price which they were required to pay for said board.

By-Law No. 8 of the defendant company reads:

“The stockholders of the company shall have the privilege of braying in any one year the product of the mill of this company in the proportion that the amount of the stock owned by them bears to the -capital stock of -the -company, and the price to stockholders only shall! not exceed $22.51 per ton for plain, steam dried straw board, free on board, at tbe mill, and tbe price on all other products of the mill shall be on the same relative basis as determined by the board of directors, and tbe board of directors are hereby empowered and directed to have said deliveries made as soon as possible, preference being given to all orders of stockholders over those who are not stockholders.”

The product of the mill was not greatly in excess of the amount which the several stockholders needed in their business.

There was no meeting of the board of directors after the daté of the passage of the resolution employing Browne" & Stuart as selling agents, until the 26th day of April, 1897, at which a resolution was adopted, discharging said Browne & Stuart from their agency.

The course pursued by Browne & Stuart ira tbe selling of the products of the mill was to have all the goods billed to them; then they billed to the several stockholders the goods which they purchased under By-Uaiw No. 8 'and charged the commission of 7 per cent, on all these sales, and also credited to themselves 3 per cent, as for cash payment of the goods.

The claim -of the defendant is thait the contract was a burdensome one upon it, unfair in its terms, and brought about by the unfair action of the plaintiffs and Bell.

The defendant claims further that the course pursued by the plaintiffs in disposing of the goods and charging up both the 7 per cent, commission 'and the 3 per cent, discount on goods taken by stockholders of the corporation, was taking an unfair advantage of the defendant, and that the action taken by the defendant in removing them was taken as early as it could be after tbe facts had become known to tbe stockholders and a board of directors could be secured which was fair and unprejudiced.

The plaintiffs reply to the answer, pleading a ratification of the contract by their being permitted to go on for the period of four months without interferemce by the defendant; and also denying all unfairness in the terms of the contract and in the manner of its procurement and its execution.

When this case was in this court before, it was held (20 C. C., 351), that the mere fact that the contract was made with Browne & Stuart while Browne .was one of the directors of the defendant company, was mot, in itself, sufficient to avoid the contract.

It was further said by the court at that time that there seemed to be nothing unfair in the contract itself.

The court, in its opinion, called attention to the fact that the other issues sought to be made in the case, bo-wit, the improper manner in -which Browne & Stuart had sought to carry out the contract, charging commission and discounts for sales made to stockholders of the company, and the question of ratification, were not made by the pleadings.

These questions, are made in the present case.

Among other complaints made by the defendant is that the court refused to give in charge to the jury before the argument of the ease, certain propositions furnished to the court by the de^ fendant in writing, with a request that they be charged before argument.

Section 5190, Rev. Stat., Subdivision 5, provides:

“When the evidence is concluded, either party may present written instructions to the court on matters of law, and request the same to be given to the jury, which instructions shall be given or refused by the court before the argument bo the jury is commenced.”

Under this provision of the law it is, undoubtedly, the right of a party to have 'given to the jury 'before argument such written propositions -as he may request, provided such propositions properly state the law applicable to the case. It is not a matter of discretion with the court to withhold the giving of such propositions until after the case is argued, and, if propositions were requested iu this ease which should have been given before argument, the refusal to give snch propositions was error for which the case should be reversed.

The defendant submitted, in writing, eight propositions to the court; each was refused, and the proper exceptions taken to such refusal.

The first of these propositions was tq the effect that if Browne was a director of the defendant company, and, at the same time, a member of the firm of Browne & Stuart at the time the contract was made, such facts alone would warrant the company in rescinding the contract.. The bolding of the court in this case when it was here before was sufficient to authorize the court 'to refuse to give this instruction.

The second proposition was that if Browne, Bell and Yeiser were interested directly or indirectly in this contract, and were members of the board of directors at the time the resolution was adopted, and voted for it, such facte would warrant the company in rescinding the contract. For the same reason that the court was justified in refusing the first proposition, it was justified in refusing this.

The third proposition requested was in these words:

“If you find from the evidence, that the plaintiffs, Browne & Stuart, while acting as selling agents for the defendant company under the resolution of employment of December 19th, 1896, bo conducted the selling agency as to make a profit for themselves which might and should have gone to the defendant company, I charge you that such conduct on their part would constitute a good reason for their discharge by the defendant company.”

This proposition should have been given; there was evidence in the case justifying it; there was evidence from which the jury might well have found that the manner in which this selling agency was conducted by Browne & Stuart was not for the best interests of the company.

Surely, if the contract entered into with Browne & Stuart, authorized them to deduct' a commission of 7 per cent, and a discount of 3 per cent, on such product of the mill as was taken by stockholders of the company under By-Law No. 8, it was a most extraordinary contract for the company to have made, and, though this court said when the case was here before, that the mere fact that directors of the company were interested for the parties with whom the company made the contract, was not in itself sufficient to warrant the rescinding of such contract, still a contract made by directors of a corporation with themselves as individuals, or with co-partnerships in. which they are interested, should be scrutinized with care. The temptation is very strong for one to look after his own interests rather than the interests of his cestui que trusts where such interests conflict.

Surely, where one acting as the director of a corporation votes for a contract with a co-partnership of which he is a member, if in the carrying out of such contract, his efforts are for the interests of his partnership as against the interests of the corporation, the rule requiring good faith to his principal on the part of an employe, should be rigidly enforced.

“A man can not serve two masters.” And, if in the serving of the one, “he” — to use the language of the request — “so conducted the business as to make a profit for himself which might and should have gone t'o the defendant company,” he has endeavored to serve the wrong master, and the other may discharge him.

The fourth proposition requested is in these words:

“If you find from the evidence, that the plaintiffs, Browne & Stuart, while acting as selling agents' for the defendant company, violated any duty which they owed to the defendant company as agents, or failed to sell the product of the defendant company to the best advantage for the defendant company so as to realize the best profits to the company, or -if they, or either of them, interfered with the management of the defendant company’s business •without authority from the board of directors, or if they failed in any other respect to perform their entire duty toward the defendant company, I charge you that such conduct would constitute a justification for their discharge and tjhie defendant company was warranted in dispensing with their services, and the plaintiffs can not recover in this action.”

This proposition, if given, would have required the jury to overlook all questions of ratification, and also to have justified the defendant in discharging the plaintiffs for the slightest failure to perform their whole duty for the defendant.

■We think the court was justified in refusing this proposition. It differs from the third in that it requires, not only absolute good faith on the part of the plaintiffs, hut the exercise of unerring judgment, and, as already said, would entirely do away with all questions of ratification. The refusal to give this request would not justify a reversal. •

The sixth proposition reads:

“If yon find from the evidence that the plaintiffs, Browne & Stuart, charged the defendant company with commissions upon goods which they, the plaintiffs, purchased from the defendant company, even though the plaintiffs were entitled as stockholders to purchase a part of the product of the defendant company’s mill, the commissions which they charged, and took, upon any portion of the-product-of defendant’s mill, to which.they might be entitled, was an improper charge and a wrongful act upon the part of the plaintiffs, and such conduct upon their part would justify their discharge by the defendant company.”

This proposition should have been given. If this is not the law properly applicable to this case, then we have the extraordinary proposition that this company made a contract with Browne & Stuart by which they should not only have a commission on all the goods which they directly or indirectly sold to anybody else, but also that they might have a commission on goods which they themselves took by virtue of By-Law No. 8. It seems incredible that such construction should b.e given to the contract. We think it clearly could not have been intended by the company, and would be such an injustice as would justify the company in discharging the plaintiffs.

The seventh proposition was properly refused. A fair construction of the resolution of December 19th, 1896, is that the mill was to be operated for a year and the plaintiffs were to sell the product for that time.

•The eighth proposition reads:

"If you find from the evidence that the contract of agency between the plaintiffs and the defendant company, entered into on the 19th day of December, 1896, was, in any. wise, unfair or unjust to the defendant company, then I charge you that by reason of that fact and the further facts, if you should so find, that Browne and Bell were 'directors of the defendant company and participated in the making of the contract with the defendant company while acting as such directors and were also interested in the profits of the contract which they were making for themselves with the company, the defendant company had the right, at its option, to discharge the plaintiffs, Browne and Stuart, and terminate the 'agency.”

It is possible that we would not feel justified in reversing the judgment in this ease because qf the failure to give this proposition, although, in the main, we believe that it properly states the law. It is .possible, however, that it might have misled the jury upon the matteT of ratification. Except' for this, we see no reason why the proposition should not have been given, for though, 'as already stated, the mere fact that directors of the corporation were interested on the other side of the contract ■would' not alone justify a rescission of the contract, yet when by ■the votes of directors of the corporation, who are interested on the other side of the contract, a contract unfair to the corporation is made — when such facts become known, the corporation is justified in rescinding such contract.

Complaint was further made of what was said by -the court in its charge to the jury. Among other things, the court' said, as -appears on page 347 of the hill of exceptions:

“It .is very clear that some one was to have the benefit of 3 per cent.- for cash payments on. the sales, that is, for 10 days, meaning thereby that if it was spot cash at the time of the transaction, -or cash within 10 days after the transaction, for such a transaction some one was entitled to 3 per cent, in addition to the 7 per cent, that the agents were to receive as their commission for the sale of the product of the mill.”

We think this was -calculated to mislead the jury. The purchaser of the goods was entitled to a discount of 3 per cent, for •cash paid within 10 days of the sale; nobody else was entitled to it. This .3 per cent. Was not- to be paid to the selling agents, hut was to be allowed the purchaser. If the purchaser failed to get this, it would not be lawful for the ageut because he had made a sale for his principal whereby he saved that' 3 per cent, to appropriate it to himself; his principal would be entitled to -that.

In its instructions to the jury as to the measure of damages to ■which the plaintiffs would he entitled if they were entitled to recover in the case, the court directed the jury that in estimating -such damages they should allow 7 per cent, on the entire product of the mill from the time the plaintiffs were discharged, up to ■the end of the year for which they were originally employed; and, in addition thereto, said to them that if the plaintiffs paid cash, ■and it might be assumed that they would, they were entitled to an .additional 3 per cent, as discounts on the sale, deducting therefrom whatever expense the plaintiffs would be put to in the performance of their work as sales agents.

We think this was erroneous. It is upon the same theory as has .already been commented upon, that the agents who made the •sales were to have the 3 per cent discount, and further, upon the -theory that they were to have both commissions and discounts on so much of t'he product of the mill as they themselves took under By-Law No. 8. What has already been said in the case express our views upon this subject.

F. M. Gorman and Edward J. Dempsey, for plaintiff in error. .

Pogue & Pogue and G. Bentley Matthews, for defendants in error.

In any proper view of the case, we think it clear that the damages allowed were excessive, and excessive because the jury must have computed something more than seven per cent, on the entire product of the mill in order to reach the verdict which they did. This they should not have done. For these errors the judgment of the court of common pleas is reversed, and the case remanded for further proceedings.  