Snodgrass v. Stubbs , 189 Md. 28 ( 1947 )

1. To be specifically enforced, a contract must be fair, certain and mutual (Miller, Equity, secs. 681, 683, 685) and must be of a class which courts deem susceptible of specific performance (sec. 668), e.g., ordinarily not a contract involving personal services, such as contracts of employment or partnership, or especially executory contracts for the formation of a partnership. Maxa v. Jones,148 Md. 459, 462-464, 129 A. 652. When contracts for personal services have been fully performed, payment may be compelled by specific performance (Mannix v. Baumgardner, 184 Md. 600,42 A.2d 124), but in cases of partial performance specific performance will not be granted (Fitzpatrick v. Michael,177 Md. 248, 9 A.2d 639), though other relief may be, in rare cases by injunction and more frequently by pecuniary compensation.McKeever v. Washington Heights Realty Corporation, 183 Md. 216, 223, 37 A.2d 305.

Ordinarily it is sufficient that contracts be fair when made, but "it would seem from many decisions, both ancient and modern, that their enforcement may be interfered with and prevented bysubsequent unforeseen events, which introduce a sufficient element of inequality, unfairness or hardship." Pomeroy,Specific Performance, 3d Ed., sec. 178; cf. Maryland Telephone Telegraph Co. v. Chas. Simons Sons Co., 103 Md. 136,63 A. 314, 115 Am. St. Rep. 346. This proposition has the support of Story, but (as Pomeroy says) is not universally admitted. If a contract is changed, manifestly it must be fair when originally made and when the changes are made.

In the instant case the contract never was performed as written. Frequent departures from the written contract and changes in circumstances not only create uncertainty as to the terms of the contract, but if plaintiff's contentions are accepted, have the effect of giving plaintiff more and more for less and less. In the circumstances any kind of specific performance would do serious injustice to defendants, and would not be warranted by the terms of the contract, with alleged changes.

2. The contract as written was wholly lacking in mutuality. It imposed no obligation on plaintiff to continue in defendants' employment. It recites that plaintiff "is now employed" by defendants, "as manager of the * * * farm, and is vitally interested in the successful operation thereof," that defendants have arranged to obtain a loan of $35,000 from the R.F.C., and in order to comply with the requirements of the R.F.C., plaintiff must furnish $5,000, "to be used as working capital for the operation of said dairy farm and mushroom business," which he has agreed to do "without any obligation on the part of the parties hereto to repay the same." (Italics supplied.) The contract provides that so long as any part of the R.F.C. loan is outstanding, plaintiff "will not claim or be entitled to any return on the * * * $5,000" and after the R.F.C. loan "has been fully paid out of the income from the operation of said dairy farm and mushroom business and after that portion of the purchase price already furnished by" defendants, "together with all other debts incurred in connection with the operation of said farm," [has been so paid] defendants "will then convey" to plaintiff "a one-third interest in the aforesaid farm and the mushroom business operated thereon." (Italics supplied.) It is not disputed that "all other debts incurred in connection with the operation of said farm" include all additional investments by defendants for fixed or working capital.

The contract was a highly speculative "shoestring" contract on both sides. Plaintiff got employment, a house and a salary. He furnished $5,000 as "working capital," in return for which he got a future contingent right to receive a one-third interest in "the farm and the mushroom business." Defendants got no house or salary, furnished $10,000 (or $15,000) capital, and mortgaged all their assets in this and other business to secure the $35,000 loan from the R.F.C.

Judge Murray suggests that the element of mutuality was supplied by oral testimony that plaintiff should continue in defendants' employment (for no definite period), though the oral testimony was contradictory as to the nature of the employment, plaintiff making the untenable claim of an existing partnership. If we accept Judge Murray's suggestion and also the contentions (which he rejected) (a) that plaintiff did not break his contract in 1942 by taking "full-time" employment with the R.F.C., and (b) that plaintiff's contingent interest expanded (as his labor shrank) to include the new canning and machinery business, still it does not follow that defendants were obligated (i) to continue indefinitely to expand their labor, investment and risk, and plaintiff's contingent interest, and (ii) also to accelerate the contingency by taking out of the business capital which could only be momentarily withdrawn, thus leaving the business without working capital (which it was the initial purpose of plaintiff's contract to provide) and putting it in debt (which it was an ultimate purpose of the contract to extinguish). When plaintiff went with the R.F.C. the business was losing money and his withdrawal gave him a larger salary, and saved defendants his salary but gave them more work. When by defendants' efforts the business had prospered, but their investment had not been repaid out of earnings, and he demanded conveyance of an interest in the property and business, he did not offer to return from the R.F.C. and do his original full share of work.

Though the contract provided that plaintiff should receive "no return" on the $5,000 till the R.F.C. loan was repaid and no repayment of the $5,000 at all, in fact interest was paid from the beginning, and the $5,000 itself was repaid early in 1945. For six months before the bill was filed, and a year before the supplemental bill, plaintiff had nothing invested in the business, was rendering no services, and was occupying the house and paying no rent. The supplemental bill was filed for the sole purpose of claiming an interest in earnings (as well as enhanced value of the property) for a later period after plaintiff's complete severance from conduct of the business. It seems impossible that this can be the true construction of the parties' contractual relations or that (if it is) such a contract would be specifically enforced by a court of equity.

3. Aside from the uncertainty as to the terms of the contract and the unfairness of the contract as construed by plaintiff, his demand for conveyance of a one-third interest in the property and business was premature. The time for such conveyance had not arrived — and never did arrive before relations between the parties were severed. Before plaintiff was to be entitled to such conveyance, defendants' investment was to be repaid out of earnings, i.e., (i) the investment must be earned and (ii) repaid. If it was repaid out of capital, e.g., out of depreciation allowances or sale of capital assets, but was not earned, the contingency had not occurred. Likewise, if the earnings exceeded defendant's investment, but the earnings (like the original capital) were invested in the expanded business and could not be withdrawn without liquidating the business or promptly replacing them or borrowing elsewhere, again the contingency had not occurred. In this there is no particular hardship to plaintiff (if that were material and would justify us in remaking the contract). While plaintiff was a full-time employee of defendants, the business was a losing venture. To keep it alive and to change an unprofitable to a profitable business, defendants were required to increase their investment to the extent of both past losses and also the needs of new businesses.

Plaintiff and defendants severed relations about the middle of 1945. The business was conducted in seasonal cycles, "from seedtime to harvest" and the like. Accounted for on a receipt basis (which was the actual method of accounting used by plaintiff as bookkeeper), the first six months of a calendar year produced profits (if any), the last six months' losses, just as a retail business might produce profits in December and losses the rest of the year. The record contains no balance sheet or earnings statement from the books as of June 30, 1945. The only such statements are those of Mr. Amos, who entirely rewrote the books, on an accrual basis, with various changes in plaintiff's book-keeping. His rewriting made material changes in earnings or surplus (an increase of $56,808.20 as of December 31, 1945), but presumably little change in cash. As of June 30, 1945 he shows $25,149.69 cash and $16,217.90 as defendants' investment. As of August 31, 1945 he shows $7,181.65 cash and $26,832.24 investment; as of December 31, 1945, $2,281.12 cash and $32,589.32 investment. Nevertheless "net profit" (as computed by Amos) was $72,126.87 as of June 30, 1945, $70,062.11 as of August 31, 1945 and $90,667.54 as of December 31, 1945. The fluctuation in cash was evidently a normal seasonal fluctuation. Defendants could not reasonably or prudently have withdrawn their $16,217.90 in order to accelerate plaintiff's contingent right (if any). If they had done so, they would have been short of cash by over $9,000 (plus additional investment of $10,000) at August 31, 1945, and by about $14,000 (plus $16,000) at December 31, 1945.

Whether plaintiff's book-keeping was strictly correct or not, there is no warrant for Amos rewriting the books so as to increase book profits by $56,000 at December 31, 1945 (probably a substantially smaller difference at June 30, 1945, as the difference between receipts and accruals would be less at that period). Either the receipt basis or the accrual basis of accounting is proper, for general purposes or for tax purposes. Except for tax purposes, the accrual basis is almost unknown in judicial accounting, e.g., in estate accounting in the Orphans' Courts or in equity courts. Whether the method used was adopted as the conservative course of not counting your chickens before they are hatched, or to avoid or evade taxes, it was evidently satisfactory to plaintiff and defendants and became a part of their contract. Amos seems to admit that growing crops and unpaid government subsidies are commonly not entered on books of account until realized in cash, and that for tax purposes farmers may use the cash method, without inventorying at all.

It may be that part of the $56,000 difference consists of inadvertent errors by plaintiff — or of errors by defendants after severance of relations with plaintiff. Any such errors (obviously the latter) should be corrected, but additional evidence would be necessary for that purpose. The treatment of depreciation and "profits on sale of equipment" must have been deliberate and should not be changed for plaintiff's benefit.

Furthermore, if the court undertook to rewrite the books, there would be plausible grounds for making some allowances, as Judge Murray did, to defendants, e.g., for interest, salaries (especially after plaintiff went with the R.F.C.) and perhaps income tax.

4. The most that plaintiff might be entitled to is compensation for partial performance, not by conveyance of any interest in the property or business but by payment to the extent of his inchoate interest in one-third of the net earnings up to severance of relations, say June 30, 1945. The record does not show directly the correct amount of such earnings. As computed from the books by Klein, the amount of profits to December 31, 1945 is $32,394.65. The last six months of 1945 apparently showed a loss (on the same basis) of $19,991.31, indicating profits of $52,385.96 to June 30, 1945. As computed by Amos from his rewritten books, the amount to June 30, 1945 is $72,126.87. The proper allowance (if any) to plaintiff would seem to be between $10,000 and $25,000, as nearly as the record shows, about $17,000. Any conveyance of an interest in the property or business would amount to specific performance of an executory agreement to form a partnership which was dissolved before it ever came into being. A sale of the property and business would be necessary to carry out the decree. The decree would bring the partnership into being only to put an end to it.

Judge DELAPLAINE authorizes me to say that he concurs in this opinion.