Black v. Lord

29 Haw. 204, 1926 Haw. LEXIS 42

• Court: Hawaii Supreme Court
• Decided: June 3, 1926
• Docket: No. 1611.
• Status: Published

Opinions

OPINION OF THE COURT BY

BANKS, J.

(Perry, C. J., dissenting in part.)

This is an appeal from an interlocutory decree. On tlie 28th day of April, 1923, the complainant brought his bill of complaint against the respondents praying for an accounting, discovery and other equitable relief. The pertinent portions of the bill are that the complainant entered into a contract of employment with the respondent E. J. Lord, who was at the time a copartner with the other respondents in a general contracting business, under the terms of which he was to receive as compensation for his services ten per cent of the net profits derived from each contract for construction work undertaken by respondents; that he was also to receive a ten per cent interest in all equipment purchased by the respondents in connection with their business during the term of the employment. The respondents deny the partnership and deny that the contract between Lord and complainant, so far as profits are concerned, is correctly stated in the bill of complaint. They admit that there was a contract between Lord and complainant but allege that by.its terms the complainant was to receive ten per cent of the net profits derived from the business as a whole during the term of complainant’s employment. They admit that complainant was also to have a ten per cent interest in the equipment purchased during that period. The court below decided all the issues in favor of the complainant and entered a decree accordingly.

So far as the respondents L. L. McCandless and Jas. S. McCandless are concerned the question that lies at the very threshold of this suit is whether there was, during the time the complainant was employed under such agreements as he had with Lord, a partnership between themselves and Lord. If there was such relation then under the general law governing the power of a partner to bind his copartners in matters relating to partnership affairs they as well as Lord became obligated to the complainant. On the other hand, if there was no such partnership agreement the interest of the McCandlesses in the questions involved in this suit is quite otherwise. It appears from the record that in December, 1918, the respondents L. L. McCandless and Jas. S. McCandless became associated with E. J.. Lord in the contracting business which Lord was then conducting. The contract between the McCandlesses and Lord was not at that time reduced to writing but rested entirely in parol. Subsequently, on the 22d day of .December, 1921, the terms of the agreement under which they had theretofore been operating were put in written form. This contract was introduced in evidence at the trial below and is now before us. According to the evidence it is in all its essential elements the same as the prior oral agreement. It is therefore evidence of what the prior oral agreement was and from it we may determine whether the McCandlesses were copartners with Lord on January 1, 1919, at which time the first contract between Lord and the complainant became effective. The contract is as follows:

“This memorandum of agreement made this 22nd day of December, A. D. 1921, by and between L. L. McCandless and J. S. McCandless (hereinafter called the ‘First Parties’) and E. J. Lord (hereinafter called the ‘Second Party’) all of Honolulu, City and County of Honolulu, Territory of Hawaii; Witnesseth:

“That whereas the Second Party is engaged in the business of general contracting in the Territory of Hawaii and has in the past required and will require financial assistance from time to time in connection with said contracting business;

“And whereas the First Parties have been and are willing to assist the Second Party financially, and otherwise, under certain terms and conditions;

“Now therefore it is agreed by and between the parties hereto as follows:

“1. The First Parties will use their best endeavors to enable the Second Party to secure the necessary contract bonds on all suitable contracts which may be procured by the Second Party, the suitability of such contracts, however, to be subject to the sole determination of the First Parties, and such contracts to be subject to their approval.

“2. The First Parties Ayill make necessary advances for payrolls, equipment and soforth on existing and further contracts held by the Second Party, but the First Parties shall have the sole right to determine when in their discretion any such advances are necessary.

“3. The First Parties shall have the right to approve or disapprove of any purchases, payments, or expenditures, made or incurred by the Second Party in connection with any of such contracts, and to approve or disapprove of the Second Party entering into any contracts for construction, including wharves, roads, buildings, or any other form of general contracting work.

“4. The Second Party shall not enter into any such contracts without the written permission of the First Parties, and shall not make any such payments or expenditures without their written approval.

“5. The First Parties shall be entitled to, and shall receive, one-half the net profit on all work done by the Second Party under all contracts in which the First Parties are in any' way interested, and shall receive, and shall be entitled to, and shall have a one-half interest in all the road equipment or other contracting equipment which has been paid for or purchased by the Second Party, or in the name of the Second Party, since December 17, 1918, or which shall be purchased by or in the name of the Second Party during the pendency of this agreement.

“6. It is hereby agreed by and between the parties hereto that inasmuch as the First Parties have assumed or paid certain sums (appearing on the books of the First Parties) over and above all the receipts from certain contracts held by the Second Party since December 17, 1918, said sums being on account of losses sustained by the Second Party under said contracts, now, therefore, before any net profits hereunder are divided the said net profits, if any, accruing upon any contract or contracts since December 17, 1918, or now, or during the term or any extension hereof, held by the Second Party, and financed wholly or in part in any way by the First Parties, shall be applied towards the repayment to the First Parties of any such losses.

“7. Whereas it was and0 became necessary for the First Parties, in order to enable the City and County of Honolulu to secure sufficient funds to award the contract for the second unit of the Kamehameha Highway improvement, to the Second Party, pursuant to his bid, to purchase certain of the territorial loan fund bonds issued in connection with said second unit of the Kamehameha Highway, and

“Whereas, it may become necessary or advisable for the First Parties to dispose of said bonds prior to the completion of the contract for said second unit, and/or prior to the termination of this agreement. Now, therefore, it is agreed that any losses incurred by the First Parties by reason of the purchase and sale of said bonds, or any part thereof, (and of the necessity or advisability of such sale, the First Parties shall be the sole judges) together with the difference between the interest paid by said bonds, and the interest paid by the First Parties for money borroAved by them to purchase said bonds, shall be considered and figured as a part of the total cost of the work under said contract, and shall be repaid before any division of profits between the parties hereto.

“8. It is further agreed that the First Parties shall be entitled to, and shall receive, interest due and payable semi-annually at the rate of seven per cent (7%) on all advances heretofore or hereafter made by them on or in connection AA’ith any contract covered by or intended to be covered by this agreement, such interest to run from the date of each advance, and to be considered and figured as a part of the cost of the work, to be repaid before any division of profits between the parties hereto.

“9. It is further agreed that the Second Party shall be entitled to and shall receive a salary of Five Hundred Dollars ($500.00) per month, to be considered and figured as a part of the cost of the work, and to be paid to the Second Party before any division of profits between the parties hereto.

“10. It is further agreed that upon the termination of this agreement by death of any of the parties hereto, or otherwise, and upon an accounting and inventory then to be had, if the amount of the advances and payments made by the First Parties since said December 17, 1918, shall not have been fully repaid to the First Parties, then, and in such case, the Second Party and his estate shall be obligated to repay to the First Parties and their respective estates such sum as shall then be found to represent the difference between the amount of such unrepaid advances and payments and fifty per cent (50%) of' the then undivided profits, if any, plus fifty per cent (50%) of the value of the plant and equipment as specified in paragraph (5) hereof. That is to say, if, at such date, for example, the books of the parties shall show that the First Parties have not up to that time been repaid say Fifty Thousand Dollars ($50,000) for advances so made as aforesaid, and the said books shall show cash and/or bills receivable amounting to Twenty Thousand Dollars ($20,000), and the plant and equipment shall be worth and be sold for Twenty Thousand Dollars ($20,000) making a total of Forty Thousand Dollars ($40,000), then the Second Party and his estate shall owe the First Parties the sum of Ten Thousand Dollars ($10,000). On the other hand, if the said cash and/or bills receivable shall amount to say, Thirty Thousand Dollars ($30,000), and the plant and equipment to Thirty Thousand Dollars ($30,000), then, in such event, the First Parties shall be entitled to Five Thousand Dollars ($5,000) and the Second Party to a like amount, the understanding of this agreement being that in case of termination hereof as aforesaid, the assets shall be turned into cash as soon as may be, and the indebtedness paid or profits divided depending upon the amount of cash then received.

“11. It is expressly understood and agreed by and between the parties hereto that nothing in or by virtue of this agreement shall constitute or be construed to constitute the relation of co-partnership between the First and Second Parties, and that the First Parties shall in nowise be responsible or shall be obliged to contribute towards any losses which may have or may hereafter accrue under or by virtue of any contracts held or to be held by the Second Party.

“12. This agreement shall terminate at the end of one year from the date hereof unless renewed in writing prior to that time. Upon the expiration, or any sooner termination hereof, an accounting shall be had between the, parties hereto and a proper adjustment made on the basis of said accounting.”

If under its terms the sole understanding of the parties of the first part (the McCandlesses) and their sole connection with the business in which they became interested was to use their best endeavors to secure contracts for the party of the second part (Lord) and to secure contract bonds for him and to advance money to him for pay rolls and the purchase of equipment and other purposes, and if it was agreed that the parties of the first part should receive as compensation merely for such services and advances one-half of the net profits derived from the business we would have serious doubts as to whether the relation of partnership was created by the contract. Under such circumstances it might well be questioned whether there was any other relation between the parties than principal and agent and debtor and creditor. But the interest it was agreed the parties of the first part should have in the property to be acquired for use in the business which they undertook to finance and the plenary control they were given over its management are entirely inconsistent with the idea that they were to receive one-half of the profits merely as compensation for their services as the agents and financial supporters of the party of the second part. By the terms of the agreement they are given the power to determine what contracts should be entered into; they are given the power to determine when in their discretion any advances for pay rolls, equipment and other purposes are necessary to be made; they are given the power to approve or disapprove any purchases, payments or expenditures to he made in connection with any of the contracts that may be entered into and to approve or disapprove of the second party’s entering into any contracts for wharves, roads, buildings or any other form of general contract work; they are given the power to forbid the second party from entering into any such contracts or making any such payments or expenditures without their written approval; they are entitled to one-half of the net profits derived from the business and to a one-half interest in all the road equipment or other contracting equipment purchased in connection therewith during the pendency of the agreement. These are not the limited rights and powers that are usually conferred upon mere agents or even creditors but are the higher functions and distinguishing characteristics of ownership. By the very terms of the contract the respondents became co-owners of the business in which they embarked and coparticipants in its management and cosharers in its profits and co-owners of the physical property acquired and used in its prosecution. These are the strongest indicia of partnership. It is futile to attempt to destroy their probative force by writing into the agreement that the parties are not partners or by providing that only one of them shall be responsible for losses. .It is not for the parties to declare the import of their agreement but for the law.

The parties of the first part, being no doubt men of large means, agreed to put into the enterprise such funds as they deemed advisable and for this it was agreed they should receive seven per cent interest on the money advanced. The party of the second part, being experienced in the business of contracting, was to devote his sexwices to the work undertaken and for this it was agreed he should receive $500 per month. It was contemplated of course that the business would be successful and the parties of the first part would get more out of it than merely the interest on their money and the party of the second part would get more out of it than a monthly salary of $500. In other words, they expected profits and this expectancy urns at least one of the incentives to their agreement. These profits, if realized, would of course be the fruit of their combined contributions of money, energy and business acumen and would be their joint property. It was therefore agreed that they should share them equally, that is, one-half to the parties of the first part and one-half to the party of the second part. These profits are no more compensation to the McCandlesses for the money advanced by them and the performance of their other obligations than they are compensation to Lord for the services rendered by him. They represent the net earnings of a common enterprise in which the parties were actively engaged as principals and in which each of them has a proprietary interest. So far as their ownership is concerned the profits are not different in character from the machinery and other equipment in which it was agreed that the parties to the contract should have a proportionate interest. If they are co-owners of the equipment, which is beyond question, they are likewise co-owners of the profits.

For the foregoing reasons we are of the opinion that during the time the complainant was employed under his contract Avith Lord the relation of partners existed betAveen L. L. McCandless, Jas. S. McCandless and E. J. Lord and therefore all the respondents are bound by said contract.

On August 19, 1919, the complainant dictated the following letter, which was typed by his wife and signed by Lord:

“Honolulu, T. H., Aug. 19, 1919.

“Mr. E. E. Black

“1640 Dole Street

“Honolulu, T. H.

“I hereby agree to pay you Tavo Hundred Fifty Dollars (f250) per month and Ten Percent- (10%) of the net profits and a Ten Per Cent (10%) interest in all equipment purchased during the period from the commencement of the Richards Street Improvement to July 1st 1920.

(Signed) “E. J. Lord.”

If this letter contains all of the terms of the agreement between the complainant and Lord and if it is free from ambiguity Ave may ascertain from it alone upon what basis the complainant’s rights in this suit are to be determined.

At the time the letter was written the respondents were engaged in a general contracting business. The complainant had been in their employment as assistant engineer and foreman under an agreement that had termi nated on or about July 1, 1919. It was mutually desired that he should remain in the employment of the respondents and the purpose of the letter was to state the agreement as to his compensation. It is clear that he was to receive $250 per month. The evidence shows, however, that subsequently this amount was increased to $300. It is equally clear that he was to have a ten per cent interest in the equipment purchased and used by the respondents in connection Avith their construction contracts during the period from the commencement of the Richards Street improvement to July 1, 1920. By mutual consent the complainant continued his services until May IS, 1922. On this date a disagreement arose between the parties concerning the interpretation of their contract and the complainant’s rights under it. This disagreement resulted in a termination of their relations.

It is contended by respondents that complainant’s interest in the equipment was limited to equipment that was paid for. The answer to this contention is that the evidence shows that all the equipment was paid for. It is also contended by the respondents that a portion at least of the equipment was paid for with borrowed money and that in this equipment the complainant has no interest. With this contention we do not agree. There is nothing in the letter from which this conclusion can be drawn. According to the letter complainant is entitled to a ten per cent interest in all the equipment purchased during the period mentioned. It is immaterial therefore, so far as the complainant’s, rights are concerned, whether the equipment was paid for with borrowed money or otherwise. He was also to receive “ten per cent of the net profits.”

It is the contention of the complainant that previous to the letter of August 19 it had been orally agreed between himself and Lord that so far as his interest in the profits was concerned it should he the same as under their prior agreement. In other words, he claims that the letter does not fully state the agreement between himself and Lord. By the terms of this prior agreement, which had already expired, the complainant was to receive as part of his compensation ten per cent of the profits on each of tAvo separate contracts, namely the Iwilei contract and the Alapai Street contract, under which the respondents were doing certain construction work for the City and County of Honolulu. Under this agreement, if the respondents made a profit on one of these two contracts and sustained a loss on the other, the interest which complainant had in the profits of the successful contract was not to be diminished or destroyed by the loss sustained on the unsuccessful contract. In testing the strength of the complainant’s contention in regard to his interest in the profits under the new agreement it must be borne in mind that he was the author of the letter in which the new agreement is set forth. The presumption therefore is very strong that if it was agreed that his interest in the profits was to be computed on the same basis as in the prior contract he would have so stated in the letter. It is most improbable that he would have left such an important feature of his compensation to be proven by parol evidence. So strong -is this presumption that nothing short of clear and convincing evidence is sufficient to overcome it. After a careful examination of the evidence introduced in the court beloAV it is our opinion that the agreement betAveen the complainant and Lord Avas not otherwise than as expressed in the letter of August 19. We shall therefore construe this letter without reference to the prior contract.

There is nothing in the letter from which the inference can be drawn that the complainant is entitled to an interest in the profits derived from such contracts as were profitable without reference to losses sustained on other contracts. He is entitled to “ten per cent of the net profits” during the term of the contract.

In the absence of explanatory or qualifying words, the natural and reasonable interpretation of the language used is that he was entitled to ten per cent of the net profits earned by the business in which the respondents were engaged during the term of his employment. If the profits on some contracts were overbalanced by losses on others there would be no profits from the business and therefore nothing to which the complainant could look for that part of his compensation. If, on the other hand, the profits derived from some of the contracts were greater than the losses sustained on others the business would show a net profit in which he would have an interest of ten per cent.

It appears from the evidence that subsequent to the time when complainant left the respondents’ employment the books of account of E. J. Lord were audited by the Henry Davis Audit Company of Honolulu. This audit was made at Lord’s expense and with the complainant’s consent. According to the auditor’s report the complainant had received $1513.34 more than he was entitled to under his contract with Lord. It is claimed by the respondents that complainant, having consented to the audit, is bound by the result and therefore has no right to an accounting in this suit. With this contention we cannot agree. While it is true the complainant consented that the audit should be made he did not agree that he would acquiesce in its results. When the report qf the audit company was made the complainant dissented from it, which he had a perfect right to do. His mere consent that the audit should be made certainly did not estop him from objecting to the findings and conclusions of the auditor.

Brown, Cristy & Davis for complainant. Huber & Kemp for respondent E. J. Lord and Smith & Wild for respondents L. L. and Jas. S. McCandless.

We agree with the conclusion of the circuit judge except in his construction of the contract between complainant and Lord. In this respect we think there was error. The case is therefore reversed and remanded with instructions to the court below to enter a decree in conformity wth this opinion.