Summary
noting that binding arbitration awards were held enforceable in Ohio, except where obtained by fraud or the like, at least as far back as 1835
Summary of this case from Stepp v. NCR Corp.Opinion
No. 34146
Decided July 13, 1955.
Arbitration — Policy of law to favor and encourage — Arbitrator's decisions — Regularity and integrity of acts favored — Binding on persons involved, when.
1. It is the policy of the law to favor and encourage arbitration, and every reasonable intendment will be indulged to give effect to such proceedings and to favor the regularity and integrity of the arbitrator's acts.
2. Where a matter is submitted to an arbitrator for decision, with an agreement that the arbitrator's decision shall be binding upon all the persons involved, such persons are bound by such decision provided there is no fraud or bad faith on the part of the arbitrator and he acts according to the instructions given him.
APPEAL from the Court of Appeals for Summit County.
Ralph E. Brennan, appellee herein, hereinafter designated plaintiff, and Arthur D. Brennan, appellant herein, hereinafter designated defendant, are brothers.
For many years plaintiff and defendant were associated together in The Brennan Company, which is engaged in the printing business in Akron. That company had 120 shares of issued and outstanding stock, of which plaintiff owned 40 shares, defendant 40 shares, and their mother 40 shares.
Since the death of plaintiff's and defendant's father about 1921 or 1922, plaintiff had been president and general manager, and defendant secretary-treasurer, although the evidence shows that defendant was in the selling end of the business and had little to do with the books, which were predominantly under the supervision of plaintiff.
Differences having arisen between the brothers, they finally decided that plaintiff would sell his 40 shares of stock to defendant. They agreed to have a contract of sale drawn by Robert Guinther, an Akron lawyer.
On January 26, 1945, the two brothers met with Guinther for the purpose of entering into a written contract of sale, and the three of them discussed the terms of the contract, plaintiff doing most of the talking for the brothers.
After the discussion, Guinther called in a stenographer and dictated the form of a contract within the hearing of the brothers. After the stenographer had reduced the dictation to writing, a copy of the contract was given to each of the brothers, and they signed the same. No question is made that the contract they signed was freely and fully entered into by each of them.
The contract reads as follows:
"Agreement."Ralph E. Brennan, of Akron, Ohio, hereinafter called the `seller' and A.D. Brennan, also of Akron, Ohio, hereinafter called the `buyer,' agree with each other as follows:
"1. The Brennan Company is a corporation organized under the laws of the state of Ohio and has issued and outstanding one hundred twenty (120) shares of common capital stock.
"2. The seller is the owner and holder of record of forty (40) shares thereof, represented by certificate number eight (8) issued on October 2, 1928.
"3. The seller has endorsed said certificate and deposited it with Robert Guinther.
"4. The buyer has delivered to the seller the sum of two thousand dollars ($2,000).
"5. The buyer and seller together direct that Chandler, Murray Chilton, certified public accountants, of Akron, Ohio, shall proceed promptly to make an examination of the property, books, accounts and assets of the corporation and shall prepare a statement showing the book value of the shares of stock of the company. Said Chandler, Murray Chilton shall employ ordinary and usual methods of accounting in preparation of such statements: shall make inventory of all work in process and raw materials; the physical inventory shall be made by Reuben Augustine at the close of business on January 31, 1945, and may be relied on by the accountants; shall include all machinery and equipment at the depreciated values thereof; shall include all accounts receivable at the value thereof which may be attributed to them by said accountants, having regard for the age of the account receivable and the like; shall give full and complete consideration to any indebtedness or accounts payable of the corporation, and do all such other things as may be necessary to determine the book value per share of each share of stock of the corporation, as of February 1, 1945.
"6. Within ten (10) days after delivery to the corporation of such report made by accountants as aforesaid, the buyer will deliver to Robert Guinther a sum equal to the difference between the book value of said forty (40) shares of the seller and the sum of two thousand dollars ($2000) this day paid. Thereupon the certificate of stock aforesaid shall be delivered to the buyer for transfer upon the books of the corporation and the sum shall be delivered to the seller.
"7. The seller has this day executed his resignation as an officer, manager and director of The Brennan Company, which said resignation has been deposited with Robert Guinther. At the time when the payment described in the paragraph next foregoing has been made, such resignation shall be delivered to the buyer for action by the directors of the corporation.
"8. Both buyer and seller agree that the determinations made by the certified public accountants aforesaid shall be final and conclusive and will direct that a copy thereof be furnished to the seller at the same time that the account is delivered to the corporation. The reasonable charges and fees of said certified public accountants shall be paid by the corporation.
"9. The buyer will cause the corporation to pay to the seller salary at the rate presently payable to him as president and general manager up to the time when the seller's resignation is presented to the corporation or until March 1, 1945, whichever period is shorter.
"In witness whereof, the parties hereto have hereunto set their hands at Akron, Ohio, this 26th day of January, 1945.
R.E. Brennan
Arthur D. Brennan
"I acknowledge that I have received the certificate of stock and the resignation described foregoing and that I will hold the same pursuant to the terms thereof.
Robert Guinther."
In pursuance of the contract, defendant delivered to plaintiff his check for $2,000, which plaintiff cashed, and plaintiff delivered to Guinther his endorsed stock certificate for 40 shares of stock, and thereafter the certified public accountants named in the contract proceeded to ascertain the book value of each share of stock of the company as of February 1, 1945.
On March 7, 1945, the accountants furnished a report to plaintiff and defendant on the examination of the books of the company as of January 31, 1945, including statements of financial condition and surplus reconciliation.
The accountants found the book value of the stock to be $238.19 per share, and asserted that such value was determined in accordance with the instructions in the agreement.
When defendant received his copy of the accountants' report, he turned over to Guinther a check in the sum of $9,090.10, which covered the balance due on plaintiff's stock at the rate of $238.19 per share, as well as the balance due on plaintiff's salary to March 1, 1945.
At the time, plaintiff was in ill health in Arizona, so that he did not receive this last check until some time in May 1945, at which time he cashed it, and then on October 11, 1945, he instituted an action against defendant, alleging in his petition that he entered into a written contract with defendant for the sale of his stock to defendant (a copy of the contract being attached to the petition); that plaintiff did all things to be performed by him under the contract but defendant paid to him only a portion of the purchase price of the stock agreed upon; and that there is due plaintiff from defendant $2,369.55, with interest at the rate of six per cent per annum from March 16, 1945, which sum is the balance of the book value of the stock, as agreed to by the parties, unpaid by defendant by reason of the fact that defendant, in the amount which he paid plaintiff for the book value of the stock, omitted an item of valuation for machinery and equipment in the sum of $6,271.27 and an item of office equipment in the sum of $837.38, or a total of $7,108.65.
Plaintiff prays judgment against defendant for the sum of $2,369.55, with interest at six per cent per annum from March 16, 1945.
Defendant filed an answer admitting that plaintiff did all things to be done by him under the contract, but denying all other allegations in the petition.
Defendant alleges further that the contract was fully performed by both parties thereto; that defendant paid to plaintiff the book value of the shares of stock of The Brennan Company as determined by the public accountants designated by the parties for such purposes, and whose determinations were by agreement final and conclusive upon both parties; and that there has been complete accord and satisfaction between the parties.
Plaintiff filed a reply denying all allegations contained in defendant's answer, except such as are admissions of allegations in plaintiff's petition, and alleging that the contract of sale required the public accountants to make an examination of the books of The Brennan Company, to prepare a statement showing the book value of the property and assets and the book value of the shares of stock of the company, and, in doing so, to employ the ordinary and usual methods of accounting applicable to the preparation of such statements: that such accountants did not do the same but arbitrarily employed extraordinary and unusual methods in the preparation of such statement, contrary to the terms of such contract; that such statement did not show the true book value or true depreciated values of machinery, equipment and office equipment, as shown by the books of the company, but fixed them at a lower figure than, and contrary to, that shown by the books; that such statement showed and fixed the book value of the company at an amount less than that shown by the books of the company; and that such statement was not made in accordance with the terms and conditions required by the contract.
Upon the trial of the case in the Court of Common Pleas, defendant, at the conclusion of all the evidence, moved the court to arrest the evidence from the jury and render judgment for defendant; moved further that the court direct a verdict in favor of defendant; and moved further for nonsuit and that the court render judgment in favor of defendant, arresting the case from the jury. All three motions were overruled, defendant excepting to each overruling.
The jury returned a verdict for plaintiff. The defendant thereupon filed a motion for judgment notwithstanding the verdict, which the court overruled and entered judgment upon the verdict for plaintiff, to all of which defendant excepted.
Defendant filed a motion for a new trial, which was likewise overruled, defendant excepting to such overruling.
Upon appeal to the Court of Appeals, that court affirmed the judgment of the Court of Common Pleas.
The cause is in this court upon the allowance of a motion to certify the record.
Other facts are stated in the opinion.
Mr. James M. Hinton, for appellee.
Messrs. Brouse, McDowell, May, Bierce Wortman, for appellant.
Defendant assigns seven specifications of error, but they can be combined into three questions, as follows:
1. Did the trial court err in overruling defendant's motions to direct a verdict and render judgment in favor of defendant and to arrest the evidence from the jury, which motions were made at the conclusion of all the evidence?
2. Did the trial court err in its charge to the jury?
3. Did the trial court err in admitting incompetent evidence?
The first question is the most serious of the three, and, in view of the conclusion at which we have arrived, the other questions may be disregarded.
The question presented to us relates to the construction of the contract.
It will be noted that the contract contemplates the showing of the book value of the shares of stock of the company, and that such book value is to be determined by the accountants under certain directions as to procedure set forth therein.
No question is made as to any determination of the accountants with reference to book value, except the depreciation found by them of certain machinery, equipment and office equipment which had been mainly acquired by the company between 1904 and 1926, so that the only question is as to what value should be placed upon those items.
It seems that the accountants had been preparing statements for The Brennan Company for some 20 years.
The items in dispute had been totally depreciated by 1926, and the company had obtained the benefit of that depreciation in the filing of its income tax returns. However, in that year the company had an appraisement made of the items here in dispute, and thereafter on its books and in its statements continuously carried an item marked, "appreciation for machinery and equipment," in the amount of $6,271.27, and an item marked, "appreciation for office equipment," in the amount of $837.38, making a total of $7,108.65, and among its liabilities the company had carried an item marked, "surplus from appreciation," amounting to $7,108.65.
It appears that the accountants named in the contract had prepared the statement for the company each year, but that the statement was prepared from the books of The Brennan Company, without audit. In other words, the statement prepared each year contained the asset and liability of $7,108.65 for machinery, equipment and office equipment, which had been placed on the books in 1926, after they had previously been entirely depreciated.
Plaintiff contends that the instructions given to the accountants in the contract to prepare a statement showing the book value of the shares of stock of the company contemplate a book value to be shown according to what appeared on the books at the time of the statement, and the Court of Common Pleas was of the opinion that the instruction to the accountants, that in making up their statement they must include all machinery and equipment at the depreciated value thereof, created an ambiguity as to what the depreciated values should be, whether as they appeared on the ledger or depreciated, as the accountants claimed, by ordinary and usual methods of accounting. Therefore, the court concluded that that ambiguity must be resolved by the jury.
We are of the opinion that there is no ambiguity in the contract; that the accountants abided by its terms; and that, since the contract provides that the determination made by the accountants shall be final and conclusive, both plaintiff and defendant are bound by such determination.
As was said by Judge Zimmerman in the case of Campbell et al., Trustees, v. Automatic Products Die Co., 162 Ohio St. 321, 329, 123 N.E.2d 401:
"It is the policy of the law to favor and encourage arbitration and every reasonable intendment will be indulged to give effect to such proceedings and to favor the regularity and integrity of the arbitrator's acts. 6 Corpus Juris Secundum, 152, Arbitration and Award, Section 1; Corrigan v. Rockefeller, 67 Ohio St. 354, 367, 66 N.E. 95, 98."
As far back as 1835, this court, in the case of Ormsby's Admrs. v. Bakewell Johnson, 7 Ohio, 99, held that, where arbitrators are substituted by parties, the award of the arbitrators is final and can not be impeached for error; and that nothing but fraud in the parties or in the arbitrators can be alleged to avoid the award.
In the case of Fred R. Jones Co. v. Fath, 101 Ohio St. 47, 126 N.E. 878, this court held that, where parties to a construction contract agree to abide by the decision of an engineer or architect having oversight or supervision of such work as to the amount, quality, acceptability and fitness of the several kinds of work to be done and paid for under such contract, the decision of the arbitrator so designated is binding upon the parties unless it is shown by clear and convincing evidence that such decision is based upon fraud, dishonesty or collusion.
In the Jones Co., case, the company sublet a contract to Fath for excavation and was to pay Fath so much per cubic yard.
In the subletting contract, Fath agreed to do his part of the work in accordance with the requirements of the original contract between the city of Cleveland and the Jones company and to accept the price provided for therein to be paid as the city of Cleveland paid the Jones company. The city engineer was to determine the quantity of excavation.
When the contract was completed, Fath claimed that he had moved a much larger quantity of excavation than the city engineer determined, and that he was entitled to be paid for all that he moved.
The trial court allowed the jury to determine the amount of excavation that had been moved, and it returned a verdict for Fath for an amount greatly in excess of the price paid by the city of Cleveland to the company.
The Court of Appeals affirmed the judgment of the trial court entered upon the verdict, and this court, in reversing the judgment of the Court of Appeals, determined that Fath could recover for no more excavation than had been determined by the city engineer, since there was no evidence of fraud, dishonesty or collusion on his part.
It seems to be the universal law that where a matter is submitted by parties to an arbitrator for decision, with an agreement that the arbitrator's decision shall be binding upon the parties, they are bound by such decision provided there is no fraud or bad faith upon the part of the arbitrator and he acts according to the instructions given him.
Therefore, the question for us to decide is whether the accountants followed the directions given to them in the contract. Those directions are that they should proceed promptly to make an examination of the property, books, accounts and assets of the company and prepare a statement showing the book value of the shares of stock of the company.
It will be noted that the contract does not provide that the book value should be shown as the items were kept on the books, but that specific instructions are given as to how that book value should be ascertained.
In the first place, the accountants were directed to employ ordinary and usual methods of accounting in the preparation of such statement. That direction does not in any way indicate that in employing ordinary and usual methods of accounting it was intended to mean the ordinary and usual methods in which The Brennan Company kept its books.
The accountants were further directed to make an inventory of all work in process and raw material and that the physical inventory, to be made by Reuben Augustine at the close of business on January 31, 1945, might be relied upon by the accountants.
It is obvious that such inventory was not to be taken from the books of the company but was to be solely that made by Augustine.
The accountants were further directed that all machinery and equipment should be included at the depreciated value thereof. There is no statement that such machinery and equipment should be taken at the value thereof on the books of the company, which value for nearly 20 years had been the same, without any markdown or depreciation, and which was designated on the company's books as appreciated value, the sole direction being to include such items at the depreciated value thereof.
The accountants were further directed to include all accounts receivable at the value which the accountants might attribute to them, having regard for the age of the accounts receivable, and the like. That direction is obviously not to take the accounts receivable at the value on the books of the company but at the value attributed to such accounts by the accountants themselves.
The directions are further that the accountants give full and complete consideration to any indebtedness or accounts payable of the company and do all other things as might be necessary to determine the book value of each share of stock.
It seems to us that the directions to the accountants are neither ambiguous nor complicated. They contemplate not the book value shown on the company's ledger, but a real book value as determined by the accountants according to the directions given them.
In the directions the accountants were to employ ordinary and usual methods of accounting and to value the machinery and equipment, the only items in issue here, at the depreciated value thereof.
The accountants arrived at the depreciated value on the basis of the cost of the machinery and equipment, less depreciation.
It is true, as has been said, that for nearly 20 years the company had carried the items on the books at $7,108.65, but there had been no depreciation of that figure, so, in following the directions in the contract to value the items at the depreciated value thereof by ordinary and usual methods of accounting, the accountants did that very thing. They testified that to value the machinery and equipment on the basis of its cost, less depreciation, is an ordinary and usual method of accounting.
The accountant who testified for plaintiff, although he strenuously contended that he would have used another method, did concede that the accountants named in the contract could be correct in interpreting the word, "value," as meaning depreciated cost, but that the word could mean other things which he would have used had he been determining the depreciated value.
The standard books on accounting designate depreciated cost as an ordinary and usual method of determining value.
In Accountants Handbook (3 Ed.), edited by W.A. Patton, professor of accounting at the University of Michigan, it is stated, as follows, at page 658:
"Depreciation as a rule is based on cost value although there are special bases allowed in certain circumstances for income tax purposes * * *. Of the various methods of apportioning depreciation employed in practice the so-called straight line plan is much the most common. The basic estimate in the measurement of depreciation is that of effective service life * * *."
In Accounting for Lawyers, by A.L. Shugerman, associate professor of accounting at Western Reserve University, it is stated at page 277:
"Depreciation accounting is one of those subjects that has been oft maligned and more frequently misunderstood. As in other situations, malignment and misunderstanding make compatible companions.
"In many instances, the reason for the misunderstanding is a failure to realize that the depreciated value of an asset does not necessarily represent the amount for which it can currently be sold. The depreciated value in no sense purports to be the market price. The depreciated value merely represents that part of an asset's basis (usually cost) that has not yet been chipped away as depreciation expense charges to P L."
In General Accounting, by H.A. Finney, professor of accounting at Northwestern University, it is stated, as follows, at page 256:
"It is considered good accounting to show fixed assets in the balance sheet at cost less proper deductions for depreciation, depletion and amortization."
Since, as we have said, where parties submit a disputed question to a skilled arbitrator, giving him directions as to making the determination entrusted to him, and he, without bad faith or fraud, follows those directions, and the parties agree to abide by his decision, neither party can thereafter question that decision simply because some other skilled person might have arrived at a different decision.
We hold that, under the contract between plaintiff and defendant, the accountants, who were the arbitrators whose decision was to be final and conclusive, did follow the directions in the contract and did employ ordinary and usual methods of accounting in determining the value of machinery and equipment of The Brennan Company at the depreciated value thereof. They were not told to find the actual value of such items, and if they had made an appraisement and done so, either one of the parties who had been harmed thereby could have questioned the accountants' statement because an appraisement of actual value would have been a departure from the directions in the contract.
Therefore, when the accountants valued the machinery on a depreciated cost basis at $1,717.85, and the office equipment on the same basis at $92.54, and stated that those values were not necessarily the present true values, they acted only in accordance with the instructions given them, and, by their contract with each other, plaintiff and defendant are bound by such determination.
It follows that the judgment of the Court of Appeals must be, and it hereby is, reversed, and final judgment rendered for defendant.
Judgment reversed.
WEYGANDT, C.J., MATTHIAS, HART, ZIMMERMAN, BELL and TAFT, JJ., concur.