Illinois Controls, Inc. v. Langham

639 N.E.2d 771, 70 Ohio St. 3d 512
Ohio Supreme Court·Decided October 12, 1994·No. No. 92-2212·Published·Cited by 142 cases

Opinion

A. William Sweeney, J.

I

The present action requires us to determine the obligations created by the preincorporation agreement (“PIA”), whether such obligations have been breached and, if so, what parties are liable therefor. Appellees contend that the reference in the PIA to the marketing capabilities of Clark Balderson and BI was merely prefatory and therefore created no marketing obligation. The court of appeals agreed.

We are unable to concur in this conclusion. A review of the PIA reveals that the only “prefatory” language appears in the “whereas clause,” which set forth the parties’ desire to manufacture and sell CSMs. Significantly, Article II of the agreement, which recites Balderson’s marketing obligations, is introduced by the following phrase: “NOW, THEREFORE, pursuant to the mutual covenants herein contained, the parties hereto agree as follows.” (Emphasis added.) The agreement leaves little doubt that marketing of the CSM was one of the “covenants” to which the parties “agreed” in the introductory sentence.

Even if it were not expressly set forth in the PIA, appellees would still have the obligation to exert reasonable efforts to market the CSM. In Wood v. Lucy, Lady Duff-Cordon (1917), 222 N.Y. 88, 118 N.E. 214, the defendant, Lucy, Lady Duff-Gordon, was a self-described “creator of fashions.” Creations bearing her name enjoyed a heightened level of market acceptance due to her association therewith. The plaintiff, Otis Wood, and the defendant agreed that he was to have the exclusive right, subject to her approval, to market products bearing her name. In exchange, defendant was to receive fifty percent of the profits derived from the enterprise. Rejecting defendant’s claim that no binding contract existed because there was no mutuality of obligation, Judge Cardozo, writing for the court, concluded that plaintiffs implied promise to market defendant’s fashions supplied the necessary consideration.

Appellees question Wood’s applicability, contending that mutuality of obligation is not an issue in the present case.

[520]*520However, Wood is instructive in its description of the plaintiffs obligation and the strong resemblance that it bears to responsibilities assumed by the appellees in the case at bar. Judge Cardozo remarked:

“The implication [of a clause in the agreement] is that the plaintiffs business organization will be used for the purpose for which it is adapted. But the terms of the defendant’s compensation are even more significant. Her sole compensation for the grant of an exclusive agency is to be one-half of all the profits resulting from the plaintiffs efforts. Unless he gave his efforts, she could never get anything. Without an implied promise, the transaction cannot have such business ‘efficacy as both parties must have intended that at all events it should have.’ * * * His promise to pay the defendant one-half of the profits and revenues resulting from the exclusive agency and to render accounts monthly was a promise to use reasonable efforts to bring profits and revenues into existence. For this conclusion the authorities are ample. * * *” (Emphasis added.) 222 N.Y. at 91-92, 118 N.E. at 215.

In this case, as in Wood, the obligor gained the exclusive right to market the product in return for a percentage of the revenues. Moreover, as in Wood, the goal of the enterprise and appellant’s receipt of royalties could be achieved only if appellees exerted reasonable efforts to market the product. The promise to perform such an undertaking is neither illusory nor indefinite. See 1 Restatement of the Law 2d, Contracts (1981) 197, Section 77, Comment d, Illustration 9.

Consequently, we hold that a contractual provision which gives a party the exclusive right to market a product on behalf of another imposes upon that party a duty to employ reasonable efforts to generate sales of the product.

The PIA makes this obligation clear. Evidence at trial further demonstrated that the parties intended to exploit Balderson’s access to the heavy equipment market and, particularly, to CAT. Michael Langham testified that this was the raison d’etre for his collaboration with Balderson. This view was echoed by John Fruhwirth and Professor Nevin.

Appellees contend that this testimony constituted inadmissible parol evidence. However, the testimony is in accord with Balderson’s marketing obligation set forth in the PIA. In Ohio, parol evidence directed to the nature of a contractual relationship is admissible where the contract is ambiguous and the evidence is consistent with the written agreement which forms the basis of the action between the parties. See Watson v. Lamb (1907), 75 Ohio St. 481, 79 N.E. 1075; Hildebrand v. Fogle (1851), 20 Ohio 147, 157.

The testimony at issue merely expounded upon appellees’ marketing obligation to which the agreement refers. The testimony established the importance of Balderson’s access to the CAT accessory market for a new product such as the CSM. Indeed, this was the basis of the agreement. Even assuming that the [521]*521PIA did not clearly describe appellees’ marketing obligation, such evidence was admissible to explain the methods for attaining common objectives.1 It is axiomatic that, where a contract is ambiguous, parol evidence may be employed to resolve the ambiguity and ascertain the intention of the parties. See In re Estate of Fulk (1940), 136 Ohio St. 233, 239, 16 O.O. 273, 276, 24 N.E.2d 1020, 1023; Bowman v. Tax Comm. (1939), 135 Ohio St. 295, 300, 14 O.O. 189, 191, 20 N.E.2d 916, 918; Merchants Natl. Bank v. Cole (1910), 83 Ohio St. 50, 59, 93 N.E. 465, 467.

From a review of the PIA and the evidence, it is apparent that appellees agreed to use their best efforts to market the CSM. We must, therefore, further determine whether the evidence supports the jury’s determination that appellees had breached this duty. The parties were aware before the agreement was executed that certain marketing strategies must be followed for the product to succeed. Both parties acknowledged that approximately $225,000 over a two-year period was required to establish the product. Nevertheless, only $60,000 to $80,000 was actually committed.

Clark Balderson, prior to the PIA’s execution, told appellant that he would invest $250,000 in Illinois Controls to assure an ample supply of CSMs for the CAT market. However, only $20,000 was committed Jo the manufacture of the device.

Appellees were aware of the importance of proper training of the sales force, proper installation, demonstrations and consignment sales and the exclusive relationship of Illinois Controls with CAT. Despite this awareness, no attempts were made to address these concerns. With respect to the final issue, Clark Balderson’s actions transcended mere neglect of his marketing obligation. He sacrificed the exclusive relationship Illinois Controls was seeking to cultivate with CAT in order to sell CSMs to CAT competitors through Dymax.

Such evidence taken as a whole was more than ample for the jury to conclude that appellees breached their good faith obligation to make reasonable efforts to promote the sale of the CSM.

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Illinois Controls, Inc. v. Langham, 639 N.E.2d 771, 70 Ohio St. 3d 512 (Ohio 1994).

639 N.E.2d 771 (Illinois Controls, Inc. v. Langham) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.

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