McCulsky v. Klosterman

• Decision Date: 24 November 1890
• Parties: MCCULSKY v. KLOSTERMAN.
• Court: Oregon Supreme Court

25 P. 366

20 Or. 108

MCCULSKY v. KLOSTERMAN.

Supreme Court of Oregon

November 24, 1890

Appeal from circuit court, Multnomah county; L.B. STEARNS, Judge.

This is a suit in equity for an accounting to enforce the rights of the plaintiff under a contract with the defendant, of which the following is a copy: "This agreement made and entered into this 6th day of August, 1889, by and between John Klosterman and Alexander E. McCulsky, both of the city of Portland, county of Multnomah, and state of Oregon witnesseth: That whereas, said John Klosterman has been and now is doing business at Portland as a wholesale grocer under the firm name of Klosterman & Co.; and whereas, he said A.E. McCulsky has been and now is in the employment of the firm of Klosterman & Co., in order to fix the compensation of the said A.E. McCulsky, it is agreed as follows: The said A.E. McCulsky shall be entitled to and shall receive one-fourth of the net profits of the said firm of Klosterman & Co., commencing with the 19th day of November, 1886, and extending to and including the 19th day of November, 1888 and from the 19th day of November, 1888, up to and including the 19th day of November, 1889, the said A.E. McCulsky shall be entitled to and shall receive a sum equal to one-third of the net profits of the said firm for the said time last above named. The payments above provided for and the amounts thereof shall be ascertained and made as follows: On the said 19th day of November, 1889, an account of stock shall be taken, and from the amount of the outstanding accounts of the firm there shall be first deducted five per cent. thereof to cover losses and bad accounts; and then there shall be paid to the said A.E. McCulsky the share of net profit after said deduction to which he is entitled under this agreement. Such payment shall be made by giving him a credit on the books of said firm, or in cash upon thirty days' notice that cash is demanded. From the sum above provided to be paid to the said A.E. McCulsky, there shall be deducted all moneys drawn by him from said firm during the times hereinbefore mentioned. If on or before the 19th day of November, 1889, a new agreement is made between John Klosterman and A.E McCulsky for a further period of service, and A.E. McCulsky allows his share of the net profits, to which he is entitled under this agreement, to remain in the business, then there shall be no deduction made from the above amount, of the outstanding accounts, provided they are collected by the said firm of Klosterman & Co. to cover losses and bad accounts on the day of settlement or the 19th day of November, 1889. Witness our hands in duplicate this 9th day of August, 1889. JOHN KLOSTERMAN. A.E. MCCULSKY Executed in the presence of NORVAL FORDYCE." The defendant, after making his denials, sets up, among other things, an alleged custom or usage existing among the merchants of the city of Portland, with reference to which the said contract was executed, and in contemplation of which the said contract was modified and controlled by said custom or usage to the extent and in the manner therein alleged. During the trial, evidence of such usage or custom was admitted, which the court found to exist, and in view of which the contract was made and executed, and, to the extent and effect specified and alleged, applied it to the contract in its construction, which resulting adversely to the claim of the plaintiff in the accounting, he appeals from the decree rendered therein to this court.

(Syllabus by the Court.)

Usage may be used as evidence to interpret a contract, but not to vary or contradict it. Its purpose is to ascertain the intention of the parties where it cannot be ascertain the intention of the parties where it cannot be ascertained by the terms of the contract.

. In all contracts as to the subject-matter of which known usages prevail, the parties proceed on the tacit assumption of such usages, but commonly reduce into writing the particulars of their agreement, but omit to specify those known usages which are included as of course by mutual understanding.

Where, in a contract to ascertain the net profits of a firm, it was provided, among other things, that "from the outstanding accounts 5 per cent. be deducted to cover losses and bad accounts," and usage was admitted to show in such case that "outstanding accounts" meant those from which the bad accounts had been segregated and charged to profit and loss, held no error upon the facts as disclosed by the record.

Where the subject-matter of a contract is the ascertainment of the net profits of a firm for the purpose of paying in cash the value of a one-third share, the term "outstanding accounts," unless it otherwise appear, has a particular meaning, different from the common or ordinary meaning.

Williams & Wood, for appellant.

Stott, Boise & Stott, for respondent.

LORD J.

This suit is brought against the defendant partnership by the plaintiff, who was employed by them, but who furnished no part of the capital invested in the business upon the above agreement by which they stipulated that he should receive a sum equal to one-third of the net profits of the business for the time specified. The controversy between them arises upon the construction to be given to the contract, the counsel for plaintiff claiming that it explains itself and needs no other interpretation, while those for the defendant insist that it was made with reference to a custom or usage, and extrinsic proof of that fact is essential to arrive at the true intention of the parties. The contract provides that the plaintiff shall receive a sum equal to one- third of the net profits, and that the payment shall be ascertained as follows: "On the said 19th day of November, 1889, an account of stock shall be taken, and from the outstanding accounts of the firm there shall be first deducted five per cent. thereof to cover losses and bad accounts, and then there shall be paid to the said A.E. McCulsky the share of net profits after said deduction to which he is entitled under this agreement." "Net profits" are said to be the gain which accrues on an investment after deducting expenses and losses. "The words 'net profits,' " said VAN FLEET, V.C., "define themselves. They mean what shall remain, as the clear gains of any business venture, after deducting the capital invested in the business, the expenses incurred in its conduct, and the losses sustained in its prosecution." Park v Locomotive Works, 40 N.J.Eq. 121, 3 Atl.Rep. 162. With respect to the capital invested and the expenses incurred in the conduct of the business there is no controversy, and these elements may, for the present, be eliminated from our consideration. It is the losses sustained in the prosecution of the business to which our consideration is more particularly directed The point of contention is confined to "bad accounts" as losses, under the contract, and involves an inquiry into net profits as there provided. That point is that, "from the outstanding accounts of the firm, there shall first be deducted five per cent. thereof to cover losses and bad accounts." Is the intention of the parties so clearly expressed by those words that no extrinsic proof of usage or custom is necessary to explain and ascertain what the parties meant by them? The argument for the plaintiff is that the language of the contract cited plainly means that 5 per cent. is to be deducted or allowed for bad accounts from the outstanding accounts, whether the bad accounts in fact amount to that much or not, and that it was so plainly fixed for the purpose of easily liquidating the amount of bad accounts as losses to be deducted in computing the net profits on account of the relation of the parties, and, to avoid the controversy which might otherwise arise by charging bad accounts to profit and loss, as is usually the custom. The argument for the defendant is that there is an immemorial usage or custom among the merchants of Portland to charge all accounts considered uncollectible, or bad accounts, to profit and loss, and that such bad or uncollectible accounts are not to be considered or estimated in determining the net profits; that the parties to the contract had full knowledge of such custom, and made the contract with reference to it; and that, construing the contract in contemplation of such usage or custom, the provisions of the contract adverted to only meant or were intended to mean that 5 per cent. should be deducted for bad accounts from the outstanding accounts as remained after the uncollectible or bad accounts had been segregated by charging them to profit and loss. It thus appears that the real question at the bottom of the controversy is, how shall bad accounts to cover losses be deducted under the contract as provided from outstanding accounts after uncollectible or bad accounts have been segregated and charged to profit and loss, or from the outstanding accounts, including good and bad accounts? In its general sense, "outstanding accounts" means such accounts as are due, unpaid, uncollectible, as an ordinary outstanding draft or bond or other indebtedness, and is broad enough to include within its terms good and bad accounts which are due and unpaid. In its mercantile sense, when net profits are to be ascertained, it means such accounts as are deemed good and collectible, and from which accounts deemed to be bad and uncollectible have been segregated and charged to profit and loss. If we take...