"In this suit complainant, an employee of defendant corporation under a written contract of employment, seeks an accounting to determine the amount due him from defendant under the terms of that contract. Defendant claims that complainant has been overpaid, and counterclaims. By the contract between the parties complainant was to be paid a fixed salary (which salary has been paid), and in addition thereto 10 per cent. of the annual net profits of the corporation. Settlement of the amount due as commissions on the profits were to be made between the end of each calendar year and February 15th of the succeeding year. It is touching these commissions that this dispute arises.
"A reference has been made to a master before whom testimony on behalf of the respective parties has been taken at great length. The master has stated an account between the parties and reported to this court his findings and. conclusions in which he determines that there is due to complainant from defendant for commissions on the net profits of the year 1918 the sum of $1,915.27, and for commissions on the net profits for the year 1920 the sum of $2,854.42, in all the sum of $4,769.69, and that nothing is owing from complainant to defendant.
"Defendant corporation has filed 46 exceptions to the master's report. These will be considered herein by reference to their serial numbers, without the burdensome process of quoting the several exceptions.
"The learned master has, at the commencement of his report, made a statement of the specific issues between the parties which is so full and accurate that it may be here adopted to avoid unnecessary repetition. This statement of the master extends to page 19 of his typewritten report, at which point he reaches a discussion of the settlement made in February, 1919, for the calendar year 1918. In this preliminary statement of the master he includes findings of fact and conclusions of law which I have adopted without reservation, and which may be advantageously read as a part of these conclusions. This portion of the report of the master finds that complainant became entitled to no part of the profits of the business of the year 1916 because no net profits were earned, and that complainant became entitled to $7,801.36 as 10 per cent. of the net profits earned by defendant during the year 1917, and that complainant was paid that amount as his percentage of earnings in the settlement made for that year. Up to that point of time there appears to be no substantial dispute between the parties. Their material differences begin touching the earnings of the years 1918, 1919, and 1920.
"It will be observed by the statements of the master, already referred to, that a major part of the controversy between the parties is due to different construction placed by them on certain terms of the contract. These terms are: Defendant 'agrees to pay the second party [complainant] ten per cent. of the net profits of said business as evidenced by the books of the company, during the period of said employment. The said net profits are to be computed and accounted for annually between January 1st and February 15th of each year, beginning with the year 1917.'
"Complainant claims that this stipulation contemplates that he shall receive his specified percentage on the net profits actually earned in each year, and that these profits shall be ascertained and the percentage paid at the end of each year and before February 15th following. Defendant claims that under this stipulation the settlements must be made by the books as kept by it, and that defendant was accordingly privileged to keep its books under a system of bookkeeping whereby profits which are actually made on a contract in the year 1918 were not entered on its books as profits of that year, providing the contract was not fully completed in 1918; thus crediting the entire profits of such a contract in the year 1919 when the contract should be finished, even though it may have been almost finished in 1918. It is claimed by defendant that that practice is a recognized system of bookkeeping, and that the adoption of that system is peculiarly a prerogative of defendant, and a matter of no proper concern to others.
"It is necessarily a matter of choice on the part of a construction corporation whether it keeps its books of account by a system which credits at the end of each year as earned a proportionate part of the profits of an unfinished contract based on the percentage found to represent the profits made on that job during the calendar year, or whether it merely enters in an account on its books the receipts and expenses of that contract, and credits no part of the profits of the contract until the contract is wholly completed. But obviously rights of others may be involved in a manner to make it a source of concern to them which system is adopted. The choice between the two systems does not appear to be a matter of material concern to the government in collecting income taxes, since a profit earned but not credited at the end of a year must be reported tor the subsequent year when the contract is finished, and, if reported as part earned at the end of the year, the total amount ultimately earned must be reported and accurately adjusted by the subsequent or amended return. All this is specifically provided for in the government income tax regulations. But a choice of these two methods of accounting may be a matter of serious concern to an employee of a company who is to receive compensation for his services based upon a percentage of the net profits of the corporation during a definitely specified period, and who is not liable for losses, but merely receives no commissions if net losses result from the operations of the year. Obviously an employee under a contract of employment from January 1, 1921, to January 1, 1922, in which his compensation in addition to his fixed salary was to be a given percentage of the company's net profits during that period, would be entitled to the given percentage of net profits earned by the company during that period. He could not claim the benefits of the entire profits of a contract which had been 90 per cent. finished in the year preceding his contract, nor should he be denied the benefits of his given percentage of the profits which had been earned on a contract which had been 90 per cent. completed during the year of his employment merely because the system of accounting adopted by his employer was to estimate no profits on a contract until it should be wholly completed. In the illustration here given it seems obvious that in the former assumed case the employee would be entitled to his percentage allowance on but 10 per cent. of the profit of the given contract; in the latter assumed case, to his percentage on 90 per cent. of the given contract. For the same reason the company could not as against such an employee properly charge against profits really earned on various contracts in that year losses actually sustained in a preceding year on a contract of the preceding year merely because that contract was in part finished in the year of the employee's engagement.
"The same would be equally true of a contract for three years, extended like the present
contract by agreement an additional year. If the agreed compensation should be a percentage of the net profits for the entire period it would necessarily include in an accounting all profits made and all losses sustained for that entire period; no more and no less. But the present contract is for a period of years with the following added provision touching the percentage to be paid on the amount of net profits. 'The said net profits are to be computed and accounted for annually between January 1st and February 15th of each year, beginning with the year 1917.' This stipulation can have but one possible meaning. It means that at the end of each calendar year and before the succeeding February 15th the net profits of the preceding year are to be computed, and the employee is to be then paid his percentage on...
