GLOBE WOOLEN CO. V. UTICA GAS & ELECTRIC CO.
121 N.E. 378 (1918)



FACTS: Globe (P) owns two mills in Utica. Utica Gas (D) generates and sells electricity for light and power. Maynard is P's chief stockholder, president and board member.
Maynard is also a director of D and chairman of its executive committee. He had a single share of D's stock to get the position but returned the share and has never owned stock in D since. P was considering switching over to electrical power from steam power. P wanted to ensure that the cost of electricity and the switch over would be cost effective. Eventually, the parties agreed to a contract for the worsted mill. D proposed to supply electricity at a rate of $.0104 per kilowatt hour and guaranteed that the cost of heat, light and power would produce a savings of $300 per month from the cost of using steam power. A trial period was to run until July, 1, 1907 and then at P's option the contract was to run for five years with an option for P to renew for another five years. D made preparations to install new equipment. The contract was then presented to D's executive committee. Maynard was silent on all issues and the other members were told the rate and that it would be profitable. The contract was ratified. Maynard was excused from voting. The parties next addressed the woolen mill. The same general agreement was reached but a new provision was added; the contract was to apply to current used for extensions or additions to the mills and that in the event of a shortage of electricity, P would be a preferred customer except the city of Utica. The contract was ratified by D's executive committee. Nothing was said of the new provisions. Maynard did not vote again. P made the changes at his mills at a cost of $21,000. It became apparent immediately that D had made a losing contract. Miscalculations had been made and P began to dye more yarn and that required more power. Eventually, in 1911, D gave notice of rescission. D had supplied $60,000-69,500.75 in electricity depending on its normal billing rates and had gotten nothing from P and even owed P $11,721,41. Fallowed to continued it was estimated that losses would exceed $300,000. P sued D for performance and the referee below annulled the contracts. P appealed.

ISSUE: Is the duty of loyalty owed by a board member to his company discharged simply by refusing to vote on interested issues?

RULE OF LAW: The duty of loyalty owed by a board member to his company is not discharged simply by refusing to vote on interested issues.

HOLDING AND DECISION: (Cardozo, J.) Is the duty of loyalty owed by a board member to his company discharged simply by refusing to vote on interested issues? No. P contends that by refusing to vote his dual directorship cannot be a basis for annulling the contracts. The refusal to vote gives the transaction a presumption of propriety and requires the one who would invalidate it to probe beneath the surface. A trustee owes a duty of constant and unqualified fidelity. A dominating influence may be exerted in other ways than merely voting. A trustee cannot rid himself of the duty to warn and to denounce. Under these facts, there was an influence from beginning to end. Maynard dealt with a subordinate of D who looked to Maynard as a superior. Superior and subordinate together framed the contract that was presented to the committed without comment by Maynard. The committee knew the contract had been framed by Maynard and was told it was fair and equitable. Faith in Maynard's loyalty disarmed suspicion. A trustee may not cling to such contracts unless they are fair and equitable. The unfairness under these facts is startling. The guaranty is not limited to the statement of the conditions under which the mills were to be run. There were no conditions of usage nor any issues related to prices of raw materials for over a ten-year period and P was guaranteed to save $600 per month no matter what the result.