Illinois Controls, Inc. v. Langham

[This opinion has been published in Ohio Official Reports at 

70 Ohio St.3d 512

.]




   ILLINOIS CONTROLS, INC. ET AL., APPELLEES AND CROSS-APPELLANTS, v.
             LANGHAM ET AL., APPELLANTS AND CROSS-APPELLEES.
            [Cite as Illinois Controls, Inc. v. Langham, 

1994-Ohio-99

.]
Contracts—Provision which gives party exclusive right to market product on behalf
        of another impose duty to employ reasonable efforts to generate sales of the
        product—Parol evidence directed to nature of a contractual relationship is
        admissible, when—Corporation liable for breach of a pre-incorporation
        agreement executed on its behalf, when—Promoters of corporation who
        execute a contract on its behalf are personally liable for its breach, when—
        Corporation and its promoters jointly and severally liable for breach of pre-
        incorporation agreement, when—Civ.R. 8, construed.
1. A contractual provision which gives a party the exclusive right to market a
        product on behalf of another imposes upon that party a duty to employ
        reasonable efforts to generate sales of the product. (1 Restatement of the
        Law 2d, Contracts [1981] 197, Section 77, Comment d, Illustration 9,
        adopted.)
2. Parol evidence directed to the nature of a contractual relationship is admissible
        where the contract is ambiguous and the evidence is consistent with the
        written agreement which forms the basis of the action between the parties.
3. A corporation is liable for the breach of a pre-incorporation agreement executed
        on its behalf by its promoters where the corporation expressly adopts the
        agreement or benefits from it with knowledge of its terms. (1 Restatement
        of the Law 2d, Agency [1958] 213, Section 84, Comment d, and 269,
        Section 104, adopted.)
4. The promoters of a corporation who execute a contract on its behalf are
        personally liable for the breach thereof irrespective of the later adoption of
                             SUPREME COURT OF OHIO




       the contract by the corporation unless the contract provides that
       performance thereunder is solely the responsibility of the corporation. (2
       Restatement of the Law 2d, Agency [1958] 77, Section 326, adopted.)
5. Where a corporation, with knowledge of the agreement's terms, benefits from a
       pre-incorporation agreement executed on its behalf by its promoters, the
       corporation and the promoters are jointly and severally liable for breach of
       the agreement unless the agreement provides that performance is solely the
       responsibility of the corporation or, subsequent to the formation of the
       corporate entity, a novation is executed whereby the corporation is
       substituted for the promoters as a party to the original agreement.
6. Civ. R. 8(A) requires only that a pleading contain a short and plain statement of
       the circumstances entitling the party to relief. A party is not required to
       plead the legal theory of recovery or the consequences which naturally flow
       by operation of law from the legal relationship of the parties.
    (No. 92-2212—Submitted January 4, 1994—Decided October 12, 1994.)
APPEAL and CROSS-APPEAL from the Court of Appeals for Cuyahoga County, No.
                                      60730.
                              __________________
       {¶ 1} Defendant-appellant and cross-appellee, Michael Langham, is the
inventor of a device called the cross-slope monitor ("CSM"). The device is
employed as an accessory for heavy-duty road graders to assure a consistent angle
in the course of highway construction. On July 1, 1983, appellant applied to obtain
a patent on the CSM. Thereafter, appellant began to market the device as an
accessory to John Deere equipment through his unincorporated business, Langham
Engineering.
       {¶ 2} The CSM, if properly installed, possessed substantial cost advantages
over other methods. Todd Hale, a long-term employee of Langham Engineering,
was an expert in the proper installation technique.




                                         2
                               January Term, 1994




       {¶ 3} In the fall of 1983, Langham Engineering began to sell CSMs for use
on John Deere A Series construction equipment. During the next fifteen months,
Langham Engineering sold between ninety and one hundred of the devices through
techniques such as demonstrations and consignments. However, John Deere's share
of the road grader market was relatively small. Appellant wanted to penetrate the
larger market represented by Caterpillar Tractor Company ("CAT"). At the time,
CAT sales accounted for fifty-five to sixty percent of the world market in heavy
construction equipment.
       {¶ 4} In order to exploit this opportunity, appellant contacted Caterpillar
Venture Capital ("CAT Venture") for the purpose of locating someone who could
market the CSM as an accessory to CAT equipment. CAT Venture, in turn,
introduced appellant to plaintiffs-appellees and cross-appellants Balderson, Inc.
("BI") and its president, Clark Balderson.
       {¶ 5} In late February 1985, appellant and appellees commenced
negotiations to form a new corporation to manufacture and market a CSM for use
on CAT equipment. During negotiations, Clark Balderson represented to appellant
that he was prepared to invest $250,000 in working capital toward the development
of the project. On May 31, 1985, appellees commissioned a marketing plan to
determine the feasibility of the enterprise. The plan envisioned that BI would
market the CSM to end users of CAT equipment worldwide. The plan projected
annual sales of the CSM to be seven hundred thirty units in 1986, eight hundred
eighty-seven units in 1987 and one thousand eighty-four units in 1988.         BI
personnel expressed similarly favorable projections on September 24, 1985 and
October 24, 1985. The marketing plan also envisioned that sales of the CSM would
be limited to CAT equipment and was presented to appellant on that basis.
       {¶ 6} Appellant and appellees eventually decided to form a separate
corporate entity which would manufacture and market the CSM for use on CAT
equipment. However, it was agreed that the new entity must first satisfy its




                                         3
                            SUPREME COURT OF OHIO




preexisting financial obligations. While appellant and his company were current
on their existing debt, he nevertheless owed $185,000 on a bank loan and $83,000
to appellants and cross-appellees Joseph and Catherine Flaherty, his father-in-law
and mother-in-law, for business loans. Moreover, Clark Balderson and BI sought
to confine their future business relationship to appellant alone. Accordingly, they
sought to remove the financial interests in Langham Engineering owned by
appellant's partner, Drew Sellett, and Al Lamb, an investor. Thus, appellant was
persuaded to incur approximately $599,000 in personal debt to purchase the
interests of Drew Sellett and Al Lamb for $161,000 and $250,000, respectively,
and assume $188,000 in bank debt incurred by Drew Sellett on behalf of Langham
Engineering. Clark Balderson supplied the $250,000 to purchase Al Lamb's
interest, and appellant executed a promissory note payable to Balderson for that
amount. Appellees told appellant that the debt incurred to purchase Lamb's and
Sellett's interests would be assumed by the new entity. Langham Engineering thus
became a sole proprietorship before its assets were acquired by the new entity. The
new corporation, called Illinois Controls, Inc. (appellee and cross-appellant), was
organized for the purpose of manufacturing and marketing the CSM for use on CAT
equipment.
       {¶ 7} On October 4, 1985, the parties executed a pre-incorporation
agreement ("PIA") to create the new corporation. The PIA was signed by Clark
Balderson individually and in his representative capacity as president of BI.
       {¶ 8} The PIA provided in relevant part:
       "WHEREAS, the parties hereto desire to organize and operate a corporation
to be established under the laws of the State of Ohio which shall manufacture and
sell cross slope monitors (and other products) throughout the world.
       "NOW, THEREFORE, pursuant to the mutual covenants herein contained,
the parties hereto agree as follows:
       "ARTICLE I. Formation of New Company.




                                         4
                                January Term, 1994




       "Promptly after the date of this agreement, [BI, Clark Balderson] and
[Michael] Langham shall cause, in collaboration with each other, a new company
(hereinafter referred to as "Newco" [now known as Illinois Controls, Inc.]) to be
incorporated under the laws of the State of Ohio.
       "ARTICLE II. Newco Objectives.
       "The object of Newco is to combine the resources, technical capabilities
and production experience of Langham with the resources, engineering expertise
and marketing capabilities of [BI] and the leadership capabilities of [Clark
Balderson] in order to establish operating efficiencies in the production and
marketing of cross slope monitors and such other related products as is [sic]
mutually acceptable to the parties by maintaining the capability to provide an
assured source of such products to [BI] for marketing." (Emphasis added.)
       {¶ 9} Appellant was required to contribute $12,500 in cash and the assets
of Langham Engineering to the enterprise, including the assignment of the CSM
patent. In exchange, Illinois Controls was to assume the liabilities of appellant and
Langham Engineering in the approximate amount of $651,000. Moreover, the PIA
required Clark Balderson to contribute $37,500 and BI to contribute $250,000 in
cash to the enterprise. In exchange for these contributions, Clark Balderson was to
receive seven hundred sixty shares of common stock in Illinois Controls while
appellant was to receive two hundred forty shares.          The agreement further
designated Clark Balderson as Chairman of the Board of Directors and President of
Illinois Controls and appellant as vice-president. Appellant received an initial
salary of $75,000 per year. Appellant was also to receive royalties of five percent
of the sale price of every CSM sold by Illinois Controls as well as royalties for
future products employing the cross-slope technology. On October 8, 1985, the
CSM patent was granted to appellant. Thereafter, Illinois Controls began to
manufacture and market the CSM for use on CAT equipment. However, instead of
the $250,000 promised by Clark Balderson for CSM production, as early as October




                                         5
                             SUPREME COURT OF OHIO




1985 he indicated that he intended to spend only $20,000. Moreover, instead of the
$225,000 envisioned in the marketing plan for promoting the CSM in the first two
years, only $60,000 to $80,000 was actually committed to this goal.
        {¶ 10} In addition, BI failed to adequately train and motivate its sales force
to aggressively inform end users about the CSM's capabilities. Significantly, Clark
Balderson recognized these inadequacies but made no efforts to correct them.
        {¶ 11} The fortunes of Illinois Controls were also affected by the challenges
inherent in the marketing of a new product. Such a product needs to achieve
visibility. Mere advertising is insufficient. Demonstrations or consignment sales
and incentives for the sales force are also necessary. Again, Clark Balderson was
aware of the need for these strategies, but no incentives were ever provided, nor
was the product demonstrated in sufficient quantities to establish its visibility.
        {¶ 12} Sales of the CSM were also hampered by the inability or
unwillingness of BI to assure its operational success. The accuracy of a precision
instrument such as the CSM was dependent upon its proper calibration and
installation.   However, BI personnel did not have the necessary expertise.
Accordingly, there was no assurance that the CSM would perform properly once
installed.
        {¶ 13} These difficulties were compounded by BI's failure to develop
proper installation manuals for the CSM. While the CSM could be used on twenty-
six variations of CAT equipment, installation manuals were prepared for only two,
further undermining its success.
        {¶ 14} A final component in the success of the CSM was the support it
received from CAT and CAT dealers. BI had maintained a largely exclusive
business relationship with CAT. Thus, BI attachments were generally limited to
use on CAT equipment. This relationship gave CAT a special advantage over rivals
in the industry due to its ability to offer attachments not available on competing
products. In return, BI enjoyed the cooperation and assistance of CAT in the




                                          6
                                January Term, 1994




marketing of BI's products. This relationship between BI and CAT was precisely
the reason appellant sought an affiliation with appellees.
        {¶ 15} Nevertheless, in June 1986, when Illinois Controls was in full
production of the CAT CSM, Clark Balderson ordered appellant to develop a
version of the product for a new series of John Deere graders. This split in
production focus hurt Illinois Controls' ability to supply CAT-compatible CSMs.
It also undermined the exclusive relationship that Illinois Controls had initially
cultivated with CAT through BI. Appellant objected to the John Deere project, as
did John Fruhwirth, president of Illinois Controls at the time and vice-president of
finance for BI. Clark Balderson ignored their protests and, as a result, sales of the
CAT CSM suffered.
        {¶ 16} Concerned that BI's dealings with John Deere might jeopardize BI's
relationship with CAT, Clark Balderson sought to conceal BI's involvement by
creating a separate entity called Dymax Corporation ("Dymax") in January 1986.
However, because the CSM was unique, it was not difficult for CAT to determine
that Illinois Controls was the real source of CSMs sold for use with CAT
competitors.   The effort to market the CSM to CAT competitors ultimately
damaged its sales to CAT dealers and undermined the financial viability of Illinois
Controls. Clark Balderson recognized this risk and pursued the new strategy in
spite of it.
        {¶ 17} In early 1987, Clark Balderson terminated all but one person
engaged in manufacturing the CSM. On June 3, 1987, Clark Balderson, in an
attempt to sell the CSM technology to Spectra-Physics, Inc., represented the value
of "the product, patents, drawings, inventory, documents, jigs, fixtures, [and]
tooling equipment" associated therewith to be $4 million.
        {¶ 18} On July 16, 1987, Clark Balderson announced his intent to close the
Illinois Controls plant and shift CSM production to the BI manufacturing plant in
Wamego, Kansas. From December 1985 to September 1987, Illinois Controls sold




                                         7
                             SUPREME COURT OF OHIO




approximately forty CAT CSMs. On September 10, 1987, appellant offered to
assign his CSM patent to Illinois Controls in exchange for Balderson's assumption
of Langham Engineering's debt as provided in the PIA. However, Balderson
refused. Instead, he intended to persuade appellant to sign over certain assets,
including the patent, to Illinois Controls and then deprive the enterprise of
necessary operating funds. Thereafter, BI would acquire the assets of Illinois
Controls as a preferred creditor in a bankruptcy proceeding while assuring that the
debt personally assumed by appellant on behalf of Illinois Controls remained with
him.
       {¶ 19} On or about October 1, 1987, Illinois Controls ceased operations.
Appellant had received his salary of $75,000 in 1986 and $60,000 for 1987, but
only ten percent of the royalties owed to him under the PIA were ever paid. Finally,
none of the more than $600,000 in debt incurred by appellant personally to create
Illinois Controls was assumed or discharged.
       {¶ 20} On December 23, 1987, appellees Illinois Controls, BI and Clark
Balderson instituted this action for declaratory judgment, injunctive relief and
monetary damages against appellants Michael and Patricia Langham and Joseph
and Catherine Flaherty. Appellants answered and counterclaimed. Michael and
Patricia Langham counterclaimed against appellees for breach of the PIA (Count
One). The Langhams and the Flahertys counterclaimed against Illinois Controls
for its failure to assume the pre-existing debt owed to the Flahertys by Langham
Engineering (Count Eight).
       {¶ 21} On June 21, 1990, appellees filed a motion in limine seeking to
exclude expert testimony with respect to lost profits. On August 6, 1990, a jury
trial commenced. John R. Nevin, a professor of business and Chairman of the
Department of Marketing at the University of Wisconsin, testified for appellants
that BI's June 1985 marketing study correctly recognized that the CSM was a high
technology product very different from the mechanical implements traditionally




                                         8
                                  January Term, 1994




sold by BI and correctly anticipated the marketing challenges presented by the
introduction of such a product.         Significantly, the study acknowledged that
Balderson currently lacked the expertise to adequately market the CSM. Likewise,
Professor Nevin testified that BI's May 1985 marketing study disclosed BI's
awareness that the CSM lacked market visibility. Moreover, other documents
revealed that BI was aware of the need for consignment sales and demonstrations
and for sufficient promotional funds.           Professor Nevin concluded that BI's
promotion, training and sales efforts were insufficient to achieve success for the
product. Finally, Professor Nevin concluded that BI's effort to market a CSM for
John Deere equipment through Dymax hurt the relationship between Illinois
Controls and CAT, specifically by reducing support from CAT and CAT dealers.
           {¶ 22} However, the trial court did not allow Professor Nevin to testify on
appellant's loss of future profits as a result of appellees' inadequate marketing
efforts.
           {¶ 23} On August 17, 1990, the jury rendered a verdict in favor of
appellants Michael and Patricia Langham and against appellees Clark Balderson,
BI and Illinois Controls on Count One of the counterclaim under the promoter
liability theory, awarding damages for breach of contract of $539,000 against Clark
Balderson, $1,375,000 against BI and $752,000 against Illinois Controls. $454,000
of this amount was allocated to Clark Balderson and $298,000 to BI. The jury also
returned a verdict in favor of appellants Joseph and Catherine Flaherty on Count
Eight of the counterclaim under the promoter liability theory, awarding $110,000
in damages against Illinois Controls for its failure to assume the pre-existing debt
of Langham Engineering, allocating $66,000 of this amount to Clark Balderson and
$44,000 to BI.
           {¶ 24} Appellees appealed and appellants cross-appealed. On September
28, 1992, the Eighth District Court of Appeals reversed the judgment of the trial




                                            9
                             SUPREME COURT OF OHIO




court entered on the jury verdict and affirmed the judgment of the court excluding
expert testimony with respect to lost profits.
       {¶ 25} The cause is now before this court pursuant to the allowance of a
motion and cross-motion to certify the record.
                               __________________
       Calfee, Halter & Griswold, John J. Eklund, William E. Coughlin and David
J. Carney, for appellees and cross-appellants.
       Nurenberg, Plevin, Heller & McCarthy Co., L.P.A., Leon M. Plevin, John
J. McCarthy and Joel Levin, for appellants and cross-appellees.
                               __________________
       A. WILLIAM SWEENEY, J.
                                          I
       {¶ 26} The present action requires us to determine the obligations created
by the pre-incorporation agreement ("PIA"), whether such obligations have been
breached and, if so, what parties are liable therefor. Appellees contend that the
reference in the PIA to the marketing capabilities of Clark Balderson and BI was
merely prefatory and therefore created no marketing obligation. The court of
appeals agreed.
       {¶ 27} We are unable to concur in this conclusion. A review of the PIA
reveals that the only "prefatory" language appears in the "whereas clause," which
set forth the parties' desire to manufacture and sell CSMs. Significantly, Article II
of the agreement, which recites Balderson's marketing obligations, is introduced by
the following phrase: "NOW, THEREFORE, pursuant to the mutual covenants
herein contained, the parties hereto agree as follows." (Emphasis added.) The
agreement leaves little doubt that marketing of the CSM was one of the "covenants"
to which the parties "agreed" in the introductory sentence.
       {¶ 28} Even if it were not expressly set forth in the PIA, appellees would
still have the obligation to exert reasonable efforts to market the CSM. In Wood v.




                                         10
                                 January Term, 1994




Lucy, Lady Duff-Gordon (1917), 

222 N.Y. 88

, 

118 N.E. 214

, the defendant, Lucy,
Lady Duff-Gordon, was a self-described "creator of fashions." Creations bearing
her name enjoyed a heightened level of market acceptance due to her association
therewith. The plaintiff, Otis Wood, and the defendant agreed that he was to have
the exclusive right, subject to her approval, to market products bearing her name.
In exchange, defendant was to receive fifty percent of the profits derived from the
enterprise. Rejecting defendant's claim that no binding contract existed because
there was no mutuality of obligation, Judge Cardozo, writing for the court,
concluded that plaintiff's implied promise to market defendant's fashions supplied
the necessary consideration.
       {¶ 29} Appellees question Wood's applicability, contending that mutuality
of obligation is not an issue in the present case.
       {¶ 30} However, Wood is instructive in its description of the plaintiff's
obligation and the strong resemblance that it bears to responsibilities assumed by
the appellees in the case at bar. Judge Cardozo remarked:
       "The implication [of a clause in the agreement] is that the plaintiff's business
organization will be used for the purpose for which it is adapted. But the terms of
the defendant's compensation are even more significant. Her sole compensation for
the grant of an exclusive agency is to be one-half of all the profits resulting from
the plaintiff's efforts. Unless he gave his efforts, she could never get anything.
Without an implied promise, the transaction cannot have such business 'efficacy as
both parties must have intended that at all events it should have.' * * * His promise
to pay the defendant one-half of the profits and revenues resulting from the
exclusive agency and to render accounts monthly, was a promise to use reasonable
efforts to bring profits and revenues into existence. For this conclusion, the
authorities are ample. * * *" (Emphasis added.) 22 N.Y. at 91-92, 

118 N.E. at 215

.




                                          11
                            SUPREME COURT OF OHIO




        {¶ 31} In this case, as in Wood, the obligor gained the exclusive right to
market the product in return for a percentage of the revenues. Moreover, as in
Wood, the goal of the enterprise and appellant's receipt of royalties could be
achieved only if appellees exerted reasonable efforts to market the product. The
promise to perform such an undertaking is neither illusory nor indefinite. See 1
Restatement of the Law 2d, Contracts (1981) 197, Section 77, Comment d,
Illustration 9.
        {¶ 32} Consequently, we hold that a contractual provision which gives a
party the exclusive right to market a product on behalf of another imposes upon that
party a duty to employ reasonable efforts to generate sales of the product.
        {¶ 33} The PIA makes this obligation clear. Evidence at trial further
demonstrated that the parties intended to exploit Balderson's access to the heavy
equipment market and, particularly, to CAT. Michael Langham testified that this
was the raison d'etre for his collaboration with Balderson. This view was echoed
by John Fruhwirth and Professor Nevin.
        {¶ 34} Appellees contend that this testimony constituted inadmissible parol
evidence.    However, the testimony is in accord with Balderson's marketing
obligation set forth in the PIA. In Ohio, parol evidence directed to the nature of a
contractual relationship is admissible where the contract is ambiguous and the
evidence is consistent with the written agreement which forms the basis of the
action between the parties. See Watson v. Lamb (1907), 

75 Ohio St. 481

, 

79 N.E. 1075

; Hildebrand v. Fogle (1851), 

20 Ohio 147

, 157.
        {¶ 35} The testimony at issue merely expounded upon appellees' marketing
obligation to which the agreement refers. The testimony established the importance
of Balderson's access to the CAT accessory market for a new product such as the
CSM. Indeed, this was the basis of the agreement. Even assuming that the PIA did
not clearly describe appellees' marketing obligation, such evidence was admissible




                                         12
                                     January Term, 1994




to explain the methods for attaining common objectives.1 It is axiomatic that, where
a contract is ambiguous, parol evidence may be employed to resolve the ambiguity
and ascertain the intention of the parties. See In Re Estate of Fulk (1940), 

136 Ohio St. 233, 239

, 

16 O.O. 273, 276

, 

24 N.E.2d 1020, 1023

; Bowman v. Tax Comm.
(1939), 

135 Ohio St. 295, 300

, 

14 O.O. 189, 191

, 

20 N.E. 2d 916, 918

; Merchants
Natl. Bank v. Cole (1910), 

83 Ohio St. 50

, 59, 

93 N.E. 465

, 467.
          {¶ 36} From a review of the PIA and the evidence, it is apparent that
appellees agreed to use their best efforts to market the CSM. We must, therefore,
further determine whether the evidence supports the jury's determination that
appellees had breached this duty. The parties were aware before the agreement was
executed that certain marketing strategies must be followed for the product to
succeed. Both parties acknowledged that approximately $225,000 over a two-year
period was required to establish the product. Nevertheless, only $60,000 to $80,000
was actually committed.
          {¶ 37} Clark Balderson, prior to the PIA's execution, told appellant that he
would invest $250,000 in Illinois Controls to assure an ample supply of CSMs for
the CAT market. However, only $20,000 was committed to the manufacture of the
device.
          {¶ 38} Appellees were aware of the importance of proper training of the
sales force, proper installation, demonstrations and consignment sales and the
exclusive relationship of Illinois Controls with CAT. Despite this awareness, no
attempts were made to address these concerns. With respect to the final issue, Clark
Balderson's actions transcended mere neglect of his marketing obligation. He
sacrificed the exclusive relationship Illinois Controls was seeking to cultivate with
CAT in order to sell CSMs to CAT competitors through Dymax.

1. Such evidence has been expressly recognized as admissible to assist in the construction of pre-
incorporation agreements. See Mosier v. Parry (1899), 

60 Ohio St. 388

, 402, 

54 N.E. 364

, 367;
Henn & Alexander, Laws of Corporations and Other Business Enterprises (3 Ed. 1983) 248, Section
108.




                                               13
                             SUPREME COURT OF OHIO




       {¶ 39} Such evidence taken as a whole was more than ample for the jury to
conclude that appellees breached their good faith obligation to make reasonable
efforts to promote the sale of the CSM. Professor Nevin testified that an ineffective
or half-hearted attempt to promote a product will impair or destroy its chances for
success. The CSM was the only product sold by Illinois Controls. Clark Balderson
placed the value of the company at $4 million when he sought to sell it. Thus, the
failure to employ reasonable efforts to market the CSM destroyed its potential and
doomed a company worth $4 million.
                                          II
       {¶ 40} Appellees further challenge the award of damages in favor of
appellants Michael and Patricia Langham and against appellee Illinois Controls in
the amount of $752,000, and the allocation of $454,000 of this sum to Clark
Balderson and $298,000 to BI. The liability of Illinois Controls under the contract
arises from the relationship between Clark Balderson and BI as corporate promoters
and Illinois Controls as the resulting corporate entity.
       {¶ 41} The legal relationship between a promoter and the corporate
enterprise he seeks to advance is analogous to that between an agent and his
principal. Thus, legal principles governing the relationship are derived from the
law of agency. See Henn & Alexander, supra, at 253, Section 111; 1 Restatement
of the Law 2d, Agency (1958) 216, Section 84, Comment d; 2 Restatement of the
Law 2d, Agency (1958) 78, Section 326, Comment b.
       {¶ 42} Where an agent purports to act for a principal without the latter's
knowledge, the principal may nevertheless be liable on obligations arising from the
transaction if the principal later adopts or ratifies the agreement arising from the
transaction or receives benefits from the agreement with knowledge of its terms.
See 1 Restatement of the Law 2d, Agency (1958), Sections 82 and 98. This is true
even where the principal lacked capacity at the time of the transaction giving rise




                                          14
                                January Term, 1994




to the obligation if, after obtaining such capacity, the principal manifests acceptance
of the transaction. See id., Sections 104 and 84, Comment d.
       {¶ 43} Likewise, a corporation, which is incapable of authorizing an
agreement made on its behalf prior to its existence, may nevertheless adopt the
agreement after its incorporation. Adoption may be manifested by the corporation's
receipt of the contract's benefits with knowledge of its terms. See City Bldg. Assn.
No. 2 v. Zahner (1881), 

6 Ohio Dec. Rep. 1068

; Reif v. Williams Sportswear, Inc.
(1961), 

9 N.Y. 2d 387

, 

214 N.Y.S.2d 395

, 

174 N.E.2d 492

; Henn & Alexander,
supra, at 253-254, Section 11, fn. 6.
       {¶ 44} A corporation is therefore liable for the breach of an agreement
executed on its behalf by its promoters where the corporation expressly adopts the
agreement or benefits from it with knowledge of its terms.
       {¶ 45} The record discloses substantial evidence of the benefits conferred
upon Illinois Controls by Michael Langham pursuant to the PIA. These benefits
include the exclusive use of the CSM patent and the manufacturing capabilities of
the Spring Valley facility previously operated by Langham Engineering, the titles
to two motor vehicles, and appellant's engineering and technical expertise, which
enabled the corporation to produce its sole stock in trade, the CSM. It is therefore
beyond dispute that the corporation knowingly derived benefits from the agreement
executed on its behalf.
       {¶ 46} There was also sufficient evidence that Illinois Controls breached
the PIA, resulting in damages to appellants.            In exchange for Langham
Engineering's assets, Illinois Controls was to assume its debts and the debt assumed
by Michael Langham to facilitate the creation of the corporation. However, despite
the transfer of certain assets, Michael Langham's offer to transfer the remaining
assets, and Illinois Controls' exclusive use of Langham Engineering resources, the
corporation never assumed the debt as promised, leaving Michael Langham
responsible for personal debt amounting to approximately $784,000 (i.e., $185,000




                                          15
                              SUPREME COURT OF OHIO




in pre-existing debt and $599,000 worth of additional obligations). In addition to
the unassumed debt, appellant was owed a minimum of $10,850 in unpaid royalties
(i.e., seventy units x $3,100 x five percent). This evidence more than supports the
jury award of $752,000 in favor of Michael and Patricia Langham against Illinois
Controls. Moreover, the jury award of $110,000 in favor of Joseph and Catherine
Flaherty against Illinois Controls is clearly supported by evidence of the
corporation's failure to assume the debt owed them as required in the PIA and the
accrued interest on the debt from the date of the breach.
                                           III
        {¶ 47} Appellees Clark Balderson and BI additionally question the
assessment of damages against them for breach of the agreement by Illinois
Controls.
        {¶ 48} It is axiomatic that the promoters of a corporation are at least initially
liable on any contracts they execute in furtherance of the corporate entity prior to
its formation. See Henn & Alexander, supra, at 252, Section 111. The promoters
are released from liability only where the contract provides that performance is to
be the obligation of the corporation, Mosier v. Parry (1899), 

60 Ohio St. 388

, 404,

54 N.E. 364

, 367; 1 Seaver, Ohio Corporation Law (1989) 25, Section 9(d)(i); the
corporation is ultimately formed, Henn & Alexander, supra, at 252, Section 111,
fn. 1 and 2; and the corporation then formally adopts the contract, 1 Seaver, supra,
at 26, Section 9(d)(ii).
        {¶ 49} It is generally recognized that where a pre-incorporation agreement
merely indicates that it is undertaken on behalf of a corporation, the corporation
will not be exclusively liable in the event of a breach. Under such circumstances
the promoters of the corporation remain liable on the contract. See RKO-Stanley
Warner Theatres, Inc. v. Graziano (1976), 

467 Pa. 220

, 

355 A. 2d 830

; 1A Fletcher,
Cyclopedia of the Law of Private Corporations (1993) 465, Section 215.




                                           16
                                January Term, 1994




       {¶ 50} Formation of the corporation following execution of the contract is
a prerequisite to any release of the promoters from liability arising from the pre-
incorporation agreement. Inasmuch as the promoter-corporation relationship is
based on agency principles, a promoter will not be released from liability if the
corporation is never formed, because one may not be an agent for a nonexistent
principal. See 1A Fletcher, supra, at 465, Section 215; 2 Restatement of the Law
2d, Agency (1958), Section 326; Henn & Alexander, supra, at 252, Section 111.
       {¶ 51} Moreover, mere adoption of the contract by the corporation will not
relieve promoters from liability in the absence of a subsequent novation. See
Ballantine, Manual of Corporation Law & Practice (1930) 163, Section 47a; 1A
Fletcher, supra, at 329, Section 190; Henn & Alexander, supra, at 255, Section 111.
This view is founded upon "the well-settled principle of the law of contracts that a
party to a contract cannot relieve himself from its obligations by the substitution of
another person, without the consent of [the] other party." Ballantine, supra, at 163.
See, also, Chapin v. Longworth (1877), 

31 Ohio St. 421

. Consequently, the
promoters of a corporation who execute a contract on its behalf are personally liable
for the breach thereof irrespective of the later adoption of the contract by the
corporation unless the contract provides that performance thereunder is solely the
responsibility of the corporation.
       {¶ 52} Applying these principles to the facts of the present case, we find
that the promoters remain personally liable on the pre-incorporation agreement.
While the corporation was subsequently formed as envisioned in the contract, the
agreement does not state that the parties intended that the corporate entity was to
be exclusively liable for any breach. Even if the agreement did so provide, there is
no evidence that the corporation, once formed, formally adopted it.
       {¶ 53} Under the circumstances presented herein, both the promoters and
the corporation are liable under the contract. See 1A Fletcher, supra, at 329,
Section 190. The corporation is liable because it accepted benefits conferred by the




                                         17
                             SUPREME COURT OF OHIO




PIA with knowledge of its terms. The promoters are liable because the corporation
never formally adopted the PIA, and the PIA does not make the corporation solely
responsible for the obligations arising thereunder.
                                          IV
       {¶ 54} Inasmuch as both the promoters of Illinois Controls and the
corporation itself are liable, the nature of this shared liability remains to be
determined. While our research has failed to discover an Ohio decision which has
addressed this specific issue, resort to agency principles is, again, instructive. The
relationship between a promoter and a corporation to be formed can be compared
to the relationship between an agent and an undisclosed principal. Where a contract
is made in furtherance of the interests of an undisclosed principal, both the principal
and the agent are liable for breach of its underlying obligations. See Hutchinson v.
Wheeler (1862), 

85 Mass. (3 Allen) 577

; North Carolina Lumber Co. v. Spear
Motor Co. (1926), 

192 N.C. 377, 382

, 

135 S.E. 115, 117-118

; Lincoln Joint Stock
Land Bank v. Bexten (1933), 

125 Neb. 310, 321

, 

250 N.W. 84, 88

. Under such
circumstances, the agent and the undisclosed principal are jointly and severally
liable for breach of the agreement. See Crown Controls, Inc. v. Smiley (1988), 

110 Wash. 2d 695, 704

, 

756 P. 2d 717, 721

; Engelstad v. Cargill, Inc. (Minn. 1983),

336 N.W.2d 284, 286

; Grinder v. Bryans Rd. Bldg. & Supply Co., Inc. (1981), 

290 Md. 687, 706-707

, 

432 A.2d 453, 463-464

; Traylor v. Grafton (1975), 

273 Md. 649, 676

, 

332 A.2d 651, 668

 (applying Pennsylvania law); Joseph Melnick Bldg. &
Loan Assn. v. Melnick (1949), 

361 Pa. 328, 335

, 

64 A.2d 773, 777

; Williamson v.
O'Dwyer & Ahern Co. (1917), 

127 Ark. 530

, 

192 S.W. 899

; Lull v. Anamosa Natl.
Bank (1900), 

110 Iowa 537, 542

, 

81 N.W. 784, 786

; Cobb v. Knapp (1877), 

71 N.Y. 348, 353

; Beymer v. Bonsall (1875), 

79 Pa. 298

; 2 Restatement of the Law 2d,
Judgments (1982) 37, Section 49, Comment c; Ferson, Undisclosed Principals
(1953), 22 U.Cin.L.Rev. 131, 142-144. See, also, Maple v. Cincinnati, Hamilton
& Dayton RR. Co. (1883), 

40 Ohio St. 313

, 316-318 (joint and several liability




                                          18
                                January Term, 1994




between agent and disclosed principal for fraud committed by agent without
knowledge of principal). To the extent that Campbell v. Murdock (S.D. Ohio 1950),

90 F. Supp. 297

, is at variance with the foregoing authorities, it is disapproved.
       {¶ 55} These holdings are consistent with the shared liability for a
contractual obligation undertaken by a promoter on behalf of a yet-to-be-formed
corporation. See State v. Indus. Tool & Die Works, Inc. (1945), 

220 Minn. 591, 601-602

, 

21 N.W.2d 31, 37, fn. 2

; Universal Industries Corp. v. Lindstrom (1983),
92 App. Div. 2d 150, 152, 

459 N.Y.S. 2d 492, 494

; Ratner v. Cent. Natl. Bank of
Miami (Fla. App. 1982), 

414 So.2d 210, 212

; Malisewski v. Singer (App. 1979),

123 Ariz. 195, 197

, 

598 P.2d 1014, 1016

; 1A Fletcher, supra, at 329 and 465,
Sections 190 and 215; Ballantine, supra, at 163, Section 47a.
       {¶ 56} We therefore conclude that where a corporation, with knowledge of
the agreement's terms, benefits from a pre-incorporation agreement executed on its
behalf by its promoters, the corporation and the promoters are jointly and severally
liable for breach of the agreement unless the agreement provides that performance
is solely the responsibility of the corporation or, subsequent to the formation of the
corporate entity, a novation is executed whereby the corporation is substituted for
the promoters as a party to the original agreement
       {¶ 57} It is therefore unnecessary to consider the argument of appellees that
there was insufficient evidence to support the conclusion that Clark Balderson and
BI were the alter ego of Illinois Controls so as to permit the corporate veil of the
latter entity to be pierced. Rather, Illinois Controls and the promoters thereof (Clark
Balderson and BI) are jointly and severally liable to appellants for breach of the
PIA.
                                          V
       {¶ 58} Appellees further maintain that the judgment against them is
precluded because appellants did not assert the promoter theory in their complaint.
Civ. R. 8(A) requires only that a pleading contain a short and plain statement of the




                                          19
                             SUPREME COURT OF OHIO




circumstances entitling the party to relief. A party is not required to plead the legal
theory of recovery or the consequences which naturally flow by operation of law
from the legal relationships of the parties. "The rules make clear that a pleader is
not bound by any particular theory of a claim but that the facts of the claim as
developed by the proof establish the right to relief." McCormac, Ohio Civil Rules
Practice (2 Ed. 1992) 102, Section 5.01. See, also, Fancher v. Fancher (1982), 

8 Ohio App. 3d 79, 82

, 8 OBR 111, 115, 

455 N.E.2d 1344, 1347-1348

; 4 Anderson's
Ohio Civil Practice (1987) 272-273, Section 151.03.
       {¶ 59} Accordingly, it was sufficient that appellants set forth facts which, if
proven, established their claim for relief. It was not incumbent upon them to plead
the law which created the liability of each defendant for breach of contract or which
rendered them jointly and severally liable under the PIA. See Scandinavian-
American Bank v. Wentworth Lumber Co. (1921), 

101 Ore. 151, 157

, 

199 P. 624, 626

; 1A Fletcher, supra, at 459-460, Section 213.




                                          20
                                January Term, 1994




                                          VI
       {¶ 60} Appellants also challenge the trial court's order excluding evidence
of lost profits. Appellants proffered Professor Nevin's testimony to establish that
lost profits resulting from appellees' breach could be proved with reasonable
certainty. The trial court concluded that the evidence was too speculative. Such a
determination will not be reversed on appeal absent an abuse of discretion. See
AGF, Inc. v. Great Lakes Heat Treating Co. (1990), 

51 Ohio St.3d 177, 182

, 

555 N.E. 2d 634, 639

; Peters v. Ohio State Lottery Comm. (1992), 

63 Ohio St.3d 296, 299

, 

587 N.E.2d 290, 292

. From our review of the proffered evidence, we discern
no abuse of discretion on the part of the trial court in granting the motion in limine.
       {¶ 61} The judgment of the court of appeals is therefore affirmed in part
and reversed in part, and the cause is remanded to the trial court for reinstatement
of judgment.
                                                          Judgment affirmed in part,
                                                                      reversed in part
                                                                and cause remanded.
       MOYER, C.J., WRIGHT, RESNICK, F.E. SWEENEY and PFEIFER, JJ., concur.
       DOUGLAS, J., concurs in judgment only.
                               __________________




                                          21