Globe Woolen Co. v. Utica Gas & Elec. Co.

• Decision Date: 19 November 1918
• Citation: 224 N.Y. 483,121 N.E. 378
• Parties: GLOBE WOOLEN CO. v. UTICA GAS & ELECTRIC CO.
• Court: New York Court of Appeals Court of Appeals

224 N.Y. 483

121 N.E. 378

GLOBE WOOLEN CO.

v.UTICA GAS & ELECTRIC CO.

Court of Appeals of New York.

Nov. 19, 1918.

Appeal from Supreme Court, Appellate Division, Third Department.

Action by the Globe Woolen Company against the Utica Gas & Electric Company. From a judgment of the Appellate Division (170 App. Div. 940,154 N. Y. Supp. 1123) modifying and affirming a judgment in favor of defendant, entered on the report of a referee, plaintiff appeals. Judgment affirmed.

James F. Hubbell, of Utica, for appellant.

Nathan L. Miller, of Syracuse, for respondent.

CARDOZO, J.

The plaintiff, a corporation, sues to compel the specific performance of contracts to supply electric current to its mills. The defendant, also a corporation, answers that the contracts were made under the dominating influence of a common director; that their terms are unfair, and their consequences oppressive; and that hence they may not stand. A referee has sustained the defense; and the Appellate Division, with some modification, has affirmed his judgment.

The plaintiff is the owner of two mills in the city of Utica. One is for the manufacture of worsteds, and the other for that of woolens. The defendant generates and sells electricity for light and power. For many years John F. Maynard has been the plaintiff's chief stockholder, its president, and a member of its board of directors. He has also been a director of the defendant, and chairman of its executive committee. He received a single share of the defendant's stock to qualify him for office. He returned the share at once, and he has never held another. His property interest in the plaintiff is large. In the defendant he has none.

The history of the transaction may be briefly stated. At the beginning the mills were run by steam, and the plant was antiquated and inadequate. As early as 1903 one Greenidge, then the superintendent and later the general manager of the defendant's electrical department, suggested to Mr. Maynard the substitution of electric power. Nothing came of the suggestion then. Mr. Maynard was fearful that the cost of equipment would be too great unless the defendant would guarantee a saving in the cost of operation. None the less a change was felt to be important, and from time to time the subject was taken up anew. In 1904 there was an investigation of the power plant by Greenidge and a written report of its condition. For this service, though he was still in the defendant's employ, he was paid by Mr. Maynard. In 1905 the substitution of electricity was again considered, but dismissed as impracticable because of the plaintiff's continued insistence upon a guaranty of saving. In the fall of 1906 the project was renewed. It was renewed by Maynard and Greenidge, who debated it between themselves. There were other officers of the defendant who knew that the project was afoot, but they took no part in formulating it. Maynard still insisted on a guaranty of saving. The plaintiff's books were thrown open to Greenidge, who calculated for himself the cost of operation with steam and the probable cost with electricity. When the investigation was over, a contract was closed. It took the form of letters exchanged between Greenidge and Maynard. In the letter signed by Greenidge, the defendant proposed to supply the plaintiff's worsted mill with electricity at a maximum rate of $.0104 per kilowatt hour, and to guarantee that the cost for heat and light and power would show a saving each month of $300 as compared with the cost for the corresponding month in the year previous to the change. There was to be a trial period ending July 1, 1907. Then, at the plaintiff's option, the contract was to run for five years, with a privilege of renewal for a like term. In a letter signed by Maynard on October 22, 1906, the plaintiff accepted the proposal. At once the defendant made preparations to install the new equipment. Six weeks, later, on December 1, 1906, Mr. Maynard laid the contract before the defendant's executive committee. He went to the meeting with Mr. Greenidge. The contract was read. Mr. Lewis, the vice president, asked Mr. Greenidge what the rate would be, and was told about $.0104 per kilowatt hour. Mr. Beardsley, another director, asked whether the contract was a profitable one for the company, and was told by Mr. Greenidge that it was. Mr. Maynard kept silent. A resolution was moved and carried that the contract be ratified. Mr. Maynard presided at the meeting, and put the resolution, but was excused from voting.

This settled the problem of power for the worsted mill. Attention was next directed to the woolen mill. Again Mr. Maynard and Mr. Greenidge put the project through unaided. In February, 1907, letters, similar in most things to the earlier ones, were exchanged. The guaranty of saving for this mill as for the other was to be $300 a month. There were, however, new provisions to the effect that the contract should apply to ‘current used for any purposes in any extensions or additions to the mills,’ and that in case of shortage of electricity the plaintiff should be preferred in service over all other customers except the city of Utica. At a meeting of the executive committee held February 11, 1907, this contract was ratified. The statement was made by Mr. Greenidge, in the presence of Mr. Maynard, that it was practically a duplicate of the first contract, except that it related to another mill. Nothing was said about the new provisions. Mr. Maynard presided and put the resolution, but did not vote.

At a cost to the plaintiff of more than $21,000 the requisite changes in the mills were made, and the new power was supplied. It quickly appeared that the defendant had made a losing contract; but only gradually did the extent of the loss, its permanence, and its causes unfold themselves. Greenidge had miscalculated the amount of steam that would be required to heat the dye houses. The expenditure for coal mounted by leaps and bounds. The plaintiff dyed more yarn and less slubbing than before. But the dyeing of yarn takes twice as much heat as that of slubbing, and thus doubles the cost of fuel. These and like changes in the output of the mills had not been foreseen by Greenidge, and Maynard had not warned of them. In 1909 the defendant became alarmed at the mounting loss. Various tests and palliatives were suggested and adopted, but there was no change in the result. Finally, in February, 1911, the defendant gave notice of rescission. At that tiem it had supplied the plaintiff with electricity worth $69,500.75 if paid for at the maximum rate fixed by the contract, and $60,000 if paid for at the lowest rate charged to any customer in Utica. Yet not only had it received nothing, but it owned the plaintiff under its guaranty $11,721.41. The finding is that a like loss prolonged to the end of the term would amount to $300,000.

These are the contracts which the courts below have annulled. The referee annulled them absolutely. The Appellate Division imposed the condition that the defendant reimburse the plaintiff for the cost of installation. The defendant makes no complaint of the condition. The plaintiff, appealing, stands upon its bargain.

[1] We think the evidence supports the conclusion that the contracts are voidable at the election of the defendant. The plaintiff does not deny that this would be true if the dual director had voted for their adoption. Munson v. Syracuse, G. & C. R. R. Co., 103 N. Y. 58, 8 N. E. 355. But the argument is that by refusing to vote he shifted the responsibility to his associates, and may reap a profit from their errors. One does not divest oneself so readily of one's duties as trustee. The refusal to vote has, indeed, this importance: It gives to the transaction the form and presumption of propriety, and requires one who would invalidate it to probe beneath the surface. Davids v. Davids, 135 App. Div. 206, 209,120 N. Y. Supp. 350. But ‘the great rule of law’ (Andrews, J., in Munson v. Syracuse, G. & C. R. R. Co., supra, 103 N. Y. at page 73, 8 N. E. at page 358) which holds a trustee to the duty of constant and unqualified fidelity is not a thing of forms and phrases. A dominating influence may be exerted in other ways than by a vote. Adams v. Burke, 201 Ill. 395, 66 N. E. 235; Davids v. Davids, supra. A beneficiary, about to...