221 Mass. 86 | Mass. | 1915
The chief question presented by this case is the meaning of the words “net profits” in a contract between the plaintiff and the defendant, whereby the former became a selling agent for the defendant, a textile manufacturer, at a stated annual salary and in addition a percentage on net profits. “Net profits” have a fairly well defined significance in law. Profits in a going business implies a comparison between two dates. In the contract between these parties those dates are the begin
In order to ascertain what the difference is between the assets on these two dates, a valuation of approximate correctness ought to be made as of the several material dates. Plainly, where a manufacturing property is involved, the buildings and machinery must be considered.
The controversy in the case at bar centres on the point whether a reasonable depreciation on the building and machinery and such like physical property owned and employed by the defendant in the production of its manufactured goods should be included among the elements making up the amount to be deducted from the receipts. It is clear that the value of buildings and machinery devoted to the manufacture of textile products cannot in the nature of things be the same after a year of use that it was at the beginning. There must have been deterioration. Machinery wears out. Buildings tend toward decay. Both may diminish in value by reason of advance in the state of the art of manufacturing, or by inventions of more effective devices. In order that any such concern may be maintained at uniform efficiency, there must be allowance for depreciation. It has been decided expressly that a reasonable deduction for depreciation should be made in determining net profits in a contract between a manufacturer and agents not unlike the one at bar in its legal aspects. Stone v. Wright Wire Co. 199 Mass. 306, 308. The same conclusion in principle was reached in Knoxville v. Knoxville Water
The depreciation was not calculated by the defendant upon an actual appraisal of machines and buildings in detail, but by taking as a basis the book value of the plant óf 1908 and adding to it the actual expenditures for new construction, and then deducting a percentage of six per cent upon that total. The book value perhaps naturally would be the cost value. In the absence of any evidence showing that the book value was not the true value, this method cannot be pronounced wrong as matter of law. It cannot be said that a computation of depreciation by a percentage upon cost is not reasonably accurate for the practical purposes of a going business, in the absence of definite evidence to the contrary.
The amounts actually expended for repairs and maintenance of the plant rightly were allowed as expenses in arriving at net profits. Buildings and machinery must be kept in usable condition in order that the business may go on. That is a quite different matter from depreciation, which is a deterioration arising from age and use and improvements due to .better methods, more economical and efficient designs, inventions and general advance in the art, notwithstanding reasonable current repairs.
The master, having found that depreciation usually was reckoned in business like that of the defendant at some ratio of value to the plant, further found that the witness Fisher was qualified to express an opinion as to that ratio of depreciation. Fisher had been the assistant treasurer of the defendant for two and a half years. His experience had been mainly that of an accountant^ and he had worked in the statistical department of an insurance company, in the banking business, and for four years he had had to do with the books of four large worsted mills and knew of their practice as to the charging off depreciation. He was familiar with the real estate and the plant of the defendant, with the prices of machinery and its renewals, and had made a study of depreciation.
The plaintiff has the burden of proof. He is attacking the correctness and accuracy of the method of reaching the proper item to be deducted from the income as depreciation which was adopted by the defendant. Some amount should be deducted on this account. The defendant adopted the method commonly prevailing of deducting a percentage. The question is whether six was a wrong percentage. Plainly, the finding of the master upon this point cannot be pronounced erroneous.
The master’s finding upon depreciation is not quite clear. It is that “The item of $8,500 deducted for depreciation in 1909 was only an estimate.” We interpret this to mean that upon the evidence the plaintiff showed to the satisfaction of the master that the depreciation charged by the defendant for that year was not a reasonably accurate estimate nor based upon a “ratio to the value of the plant.” There is a finding, however, that the book value of the plant in 1908 was $127,975.31, and that the new constructions during that year amounted to $3,770.64, making a total of $131,745.95 as the value of the plant when the first contract of the plaintiff began. In view of the master’s other finding, that a six per cent annual depreciation upon the plant was a reasonable deduction, he should have made such deduction, amounting to $7,904.76, and substituted it for $8,500 in the account. The master’s further finding that the depreciation deduction made for 1911 was six per cent on the book value of the plant, shows that the defendant made no error in this respect for
During the year 1911 the defendant charged off bad debts amounting to $8,335.75 on sales made before that year. The master finds that, so far as this is a matter of fact, these debts properly might have been charged off at that time and should be deducted from the gross receipts of that year in arriving at net profits. There was error in deducting these losses arising from business done before the beginning of the plaintiff’s contract. The agreement was not that net profits should be ascertained and determined solely according to the defendant’s usual methods of bookkeeping and habits of conducting business and without any change. Such a contract might have been made. But, instead of making such a contract, the parties agreed that the plaintiff should receive a per cent on the “net profits.” These words mean in this connection that the parties have agreed to consider the business of that year by itself, separate and apart from the years which have gone before and are to follow. It is in this respect as if a new partner were admitted to a firm without agreement to assume debts and assets. A new set of books would need to be opened, recording only the transactions of the new year or period. The natural inference from the contract is that the plaintiff as selling agent would find his good judgment and skill in this department reflected in the profits, on which his percentage would be based; while the defendant would see the activity and efficiency of the plaintiff due tó this incentive, resulting in increased sales. This may be inconvenient. It may necessitate keeping the books open to determine losses after the contract period has ended. But it is inevitable from the nature of such a contract. The net profits of a business for a specified time may be calculated in accordance with any reasonable method, until the rights of a third person intervene. Then they must be determined in a way to be just to him. In the absence of a definite stipulation to that effect, it would not be fair to one who has become interested in a business on the basis of profits for a fixed time, to share in losses incurred before that time. The expenses, the losses and the gains accruing to the defendant’s business during the period of the plaintiff’s employment, even though not realized until after its termination, must form the basis on which his percentage must
Seemingly there must be a further hearing or agreement by the parties to settle this branch of the case. The plaintiff’s fifth exception, relating to this point, must be sustained and all his other exceptions overruled. The defendant’s first exception to the master’s ruling, in substance that no deduction for depreciation of machinery and plant should be made in ascertaining the net profits, must be sustained and its other exception, being waived, is overruled. The interlocutory decree is modified by sustaining these exceptions. The final decree must be reversed.
So ordered.
