33 Wn.2d 169, SUPERIOR PORTLAND CEMENT, INC., Appellant, v. PACIFIC COAST CEMENT COMPANY, Respondent
[No. 30700. En Banc. Supreme Court April 14, 1949.]
SUPERIOR PORTLAND CEMENT, INC., Appellant, v. PACIFIC
COAST CEMENT COMPANY, Respondent.«1»

The right of first refusal, or option, is also referred to in Roth v. Snider, 25 Wn. (2d) 514, 171 P. (2d) 819. The facts in the case cited differ from those in the case at bar, but the case is of interest in connection with some phases of the case at bar.

The case of Jurgensen v. Morris, 194 App. Div. 92, 185 N. Y. Supp. 386, concerned a lease which contained the following provision:

"`And the said parties of the first part agree that in the event of their desire to sell the above mentioned property, before the expiration of this lease, that the party of the second part shall have the first option to purchase.'"

In construing the provision, the court said:

"The decision apparently found that the said covenant in the lease did not obligate the defendants to sell to plaintiff, and the respondents' brief here so contends; and the comment of the learned trial justice indicates that that was his view. I do not agree with that view. I think that the covenant was based upon a sufficient consideration, namely, the covenants on the part of the tenant; and that it obligated the defendants, if they wished to sell to another person during the term, to give the plaintiff the opportunity to take the property upon the same terms; in other words, that it required the defendants after receiving the Keiser offer to offer the property to plaintiff upon the same terms. The case of Bullock v. Cutting (155 App. Div. 825) appears to me to be precisely in point, except the covenant there in said option of buying `at the price which first parties [the landlord] desire to sell.' That much, to my mind, is fairly implied in the term used, `first option.'"

In Schroeder v. Gemeinder, 10 Nev. 355, appears the following:

"The first question in this case involves a construction of the covenant giving appellants the first privilege of purchasing the leased premises. What does this covenant mean? It must be so construed as to carry out the real intention of the parties at the time of signing the lease."

In the case of Hayes v. O'Brien, 149 Ill. 403, 37 N. E. 73, 23 L. R. A. 555, the supreme court of Illinois held that, pursuant to an agreement in a lease which reserved to the lessor the

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privilege of selling a portion of the leased premises at any time, but further provided that

"`. . . no such sale of said land shall be made by said first party without first having given said second party the privilege of purchasing said land upon such terms and at the same price per acre as any other person or purchaser might have offered therefor,'" conferred upon the lessee the right to purchase at a price offered by another if the lessor decided to sell at that price. The court called attention to the fact that the provision of the lease above referred to did not obligate the lessor to sell, but was effective to accord the lessee the right to purchase if the lessor desired to sell at an offered price.

In the cases above cited, the right of a first refusal granted to a lessee was, generally speaking, upheld.

The supreme court of New Hampshire, in the case of Robinson Co. v. Drew, 83 N. H. 459, 144 Atl. 67, considered a question similar to that here presented. The option clause in the lease considered by the court read: "`and that in case of a sale of the block by the lessors, the lessee shall have the preference as a purchaser.'" The lessor decided to sell the property during the term of the lease and offered to sell to the lessee at a price the lessee declined to pay. Later, the lessor sold the property at a lower price, without first giving the lessee an opportunity to purchase at that price. The trial court dismissed the action. The order dismissing the action was reversed. In the course of the opinion, the supreme court said:

"The fair and reasonable meaning of the clause is that if the lessor should decide to sell during the term, he would give the lessee the first chance to buy at the price he asked.

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Decision to sell meant decision on the price to be asked. Any other construction would make the clause ineffective, and since the parties intended an effective meaning, one that is ineffective is not to be preferred. . . .

"The lessor's offer at a price the lessee declined to pay did not discharge him from obligation to offer when he decided to sell at a lower price. The lessee's `preference as a purchaser' continued during the term unless the property was sold at a price the lessee would not pay. Decision to sell at the reduced price was within the tenor and scope of the option, and the lessee's right to buy thereat was given as much as the right to buy at the higher price. The option did not mean that its obligation should be discharged upon the rejection of a single offer. A contrary view, if it would not be promotive of bad faith, would largely destroy the evident purpose the option sought to accomplish."

In Restatement, Property, 2442, § 413, it is stated that, where the rights of the designated person (in such a case as this) are contingent upon the desire of the owner to sell, the divisions of the contract are analogous to options upon a condition precedent, and subject to many of the same rules.

In other texts are found the following statements concerning these rules:

"In the exercise of the option, time is of the essence; . . . However, where the lessor prevents the exercise of the option during the time limited, he may not avail himself of his own wrong, and the lessee has a reasonable time to exercise it after the obstacle has been removed." 51 C. J. S. 644, § 84.

"It is a principle of fundamental justice that if a promisor is himself the cause of the failure of performance, either of an obligation due him or of a condition upon which his own liability depends, he cannot take advantage of the failure." 3 Williston on Contracts (Rev. ed.) 1952, § 677.

This court, in the case of Union Oil Co. v. Hale, 163 Wash. 503, 2 P. (2d) 87, held that, under a two-year lease, from September 1, 1927, containing an option to renew the lease for one year, and a further option "to elect, at any time prior to August 31st, 1930," to purchase the demised premises, the option to purchase was not dependent upon the renewal of the lease for a third year. The lessee held over after the

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expiration of the lease and the option was held effective although exercised after the expiration of the lease.

In the course of the opinion, we quoted from 35 C. J. 1040, the following:

"`Under the rules of construction applicable to contracts generally, a provision in a lease giving an option to purchase will be so construed as to effectuate the intention of the parties where it is ascertainable from the language employed by them, and where the parties express without ambiguity their intention, no room for juridical construction is left and no court can alter their agreement, although the bargain is hard or unwise.'"

In the case of Time Oil Co. v. Palmer, 28 Wn. (2d) 272, 182 P. (2d) 695, this court held that a lessee's option to purchase, contained in the lease agreement, was based upon a good consideration and was enforcible. It was held that the lessee had the unqualified right to purchase at any time the lessor decided to sell. The opinion continues: "Mrs. Bogardus decided to sell. It mattered not to whom, or when, and respondent elected to exercise its right to purchase." This court affirmed the judgment of the superior court, holding that the lessee's right was superior to the right of the third party to purchase the property. In the case cited, the lessor, while a party to the action, did not defend the action, the contest being between the lessee and a third panty who relied upon an option granted by the lessor.

[2] By the paragraphs of the lease agreement between the parties above quoted, there was granted to appellant an option to renew the lease for another five-year term after the expiration of the first term fixed by the lease. Appellant availed itself of this option and, after the expiration of the second term, the lease was again renewed, and the lease was maintained in full force and effect until December 31, 1946. By another provision of the lease, respondent agreed "that if at any time or times during the term of this lease or during the five year period of extension, if extended, Pacific decides to sell, subject to this lease," the demised premises, it would give to appellant "the first right and privilege of purchasing the same at the price it is willing or at any time

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or times offers to sell to others and upon the same terms and conditions." The lease then provided that appellant should have thirty days from the date of receipt from respondent of written offer to sell in which to accept the same.

While the option granted referred only to the term of the lease and the one extension thereof provided for, it should be held that the option right continued during any subsequent agreed extensions of the lease, and this construction thereon was evidently adopted by respondent at all times during the extended terms of the lease agreement.

The thirty-day period accorded to appellant to consider any offer by respondent to sell, which respondent should submit to appellant during the term of the lease, would continue for the period mentioned, even though the term of the lease might end before the expiration of the thirty-day period. The language of the lease is clear and unambiguous. The basic condition precedent, which vests appellant with the right to consider a purchase of the property, was respondent's decision to sell during the term of the lease. If such a decision was reached during the term of the lease, appellant was entitled to the first right or option to purchase the property at the price for which respondent was "willing or at any time or times offers to sell."

Respondent had the right to sell the properties subject to the lease at any time, and it could, of course, decide, or be "willing," to sell the properties during the term. There is nothing in the lease which states that appellant's option must be exercised during the term of the lease which granted appellant thirty days, after notice from respondent, within which to decide to exercise the option or decline to do so.

The next question to be determined is whether or not respondent decided, or was willing, to sell the properties in question prior to the expiration of the lease. Respondent vigorously contends that nothing short of a definite authorization to sell at a certain price by a two-thirds vote of respondent's stockholders would amount to a decision to sell on the part of respondent.

Respondent relies upon the general rule that corporations act through their boards of trustees and their stockholders,

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and that certain corporate acts must be ratified by the stockholders, sometimes by a two-thirds majority thereof. Respondent particularly relies upon Rem. Rev. Stat. (Sup.), § 3803-36, referring to a voluntary sale of all the assets of the corporation, providing that, in certain cases, authorization for such a sale

". . . shall be given at a meeting of shareholders, duly called for the purpose, and by such vote of the shareholders as may be provided for in the articles of incorporation or, if there be no such specific provision, then by the vote of the holders of two-thirds of the voting power of all shareholders.

The option granted by the agreement to appellant was contingent only upon a decision by respondent to sell its properties. The pride formally agreed upon as the selling price was, immediately after the expiration of the term of appellant's lease, definitely adopted by the corporation itself and by all the agencies of the corporation, including the stockholders. Evidently the price fixed was satisfactory. One trustee, Mr. Brooks, objected at the meeting held January 6, 1947, as hereinabove set forth, but evidently not to the price fixed for the sale of the property, but because that trustee was of the opinion that appellant should be notified of the corporation's decision to sell.

Appellant became entitled to exercise its option if and when respondent, during the term of the lease, decided to sell, and was contingent upon the happening of that event. The price which respondent was required to quote to appellant was the figure at which respondent was willing to sell or which, at any time, it offered to sell the properties to others.

Respondent was not free to quote one price to appellant and then, as the result of negotiations with other parties, sell to another at a less price than that quoted to respondent, Respondent was free to negotiate with other parties and obtain the highest offer it could obtain for the properties, but if, during the term of the lease, respondent obtained an offer from another at which it was willing to sell the

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properties, respondent was obligated to accord to appellant the right to purchase at that price.

[3] It is a well-recognized principle of law that in certain cases a corporation may not repudiate a transaction upon the ground that the same was not consummated in accordance with certain statutory provisions covering corporate action. 6 Fletcher, Cyclopedia Corporations (Perm. ed.)1039, § 2949; United States Industrial Alcohol Co. v. Distilling Co., 89 N. J. Eq. 177, 104 Atl. 216; Lost Burros Gold Mining Co. v. Inyo County Bank, 83 Cal. App. 679, 257 Pac. 209; Bacich v. North land Transp. Co., 185 Minn. 544, 242 N. W. 379.

In Ballantine, Private Corporations (1927) 323, § 98, appears the following:

"In most of the states in which the question has arisen, if not in all, statutes requiring the written assent of stockholders to a mortgage, or other act, or their assent at a general meeting, are construed as intended for their protection and benefit only, and it has been held that they can attack the mortgage only for want of such assent; that, if they acquiesce, neither creditors of the corporation nor the corporation itself can complain. If a corporation receives and retains the consideration for a mortgage, it and its stockholders may be estopped to set up want of consent of stockholders."

On page 220, § 64, appears the following:

"Where the charter of a corporation provided that, before certain contracts should be made by the corporation, the consent of the stockholders, or a certain proportion of them, should be obtained, or that notice should be given them, it was held that the provision was intended merely for their protection, and might be waived by them, and that it did not affect the powers of the corporation."

The cases of Nelson v. Hubbard, 96 Ala. 238, 11 So. 428, 17 L. R. A. 375, and Beecher v. Marq. & Pac. R. M. Co., 45 Mich. 103, 7 N. W. 695, are of interest in this connection.

Respondent contends that appellant's option never became effective because respondent did not sell the properties "subject to this lease," and that, under the language of paragraph No. 32 of the agreement, it was a further condition

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precedent to appellant's right to purchase that a sale by respondent be subject to the lease.

We repeat the portion of the lease agreement pertinent to the question now under consideration:

"32. In consideration of one dollar and of the premises, Pacific agrees that if at any time or times during the term of this lease or during the five year period of extension, if extended, Pacific decides to sell, subject to this lease, . . . " certain premises particularly described, it will give to appellant first right of purchasing, etc., supra.

The question is whether respondent's decision to sell during the term of the lease was the particular point which brought into effect appellant's option, or whether respondent's decision to sell included, as part thereof and as a necessary element of the proposed sale, that the sale should be subject to the lease.

In construing this language, the intention of the parties, when the lease was entered into, is of primary importance. Evidently the lease was prepared by able counsel, after careful consideration.

[4] A lessor cannot terminate a lease by a sale of his interests in the demised premises unless the lease so provides, or certain legal principles be held applicable, and, generally speaking, a conveyance of property, which the grantor has leased, is subject to the rights of the lessee under a lease in good standing.

The lease agreement between the parties to this action contained no provision to the effect that any sale by respondent of the properties, during the term of the lease, should end appellant's rights thereunder. The lease was for a long term, covering a manufacturing plant and a quarry.

Manifestly, if appellant's operations, pursuant to the lease, were successful, it might well be interested in purchasing the properties. If it was so interested, its interest would be the same whether respondent decided to sell subject to the lease, or otherwise. The question of importance to appellant was respondent's decision to sell the properties,

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and, if respondent did reach such a decision while the lease was in force, appellant was careful to reserve to itself the first option to purchase.

Respondent relies upon the case of Signal Oil Co. v. Republic Inv. Co., 11 Wn. (2d) 325, 118 P. (2d) 957. This was an action brought by the lessee to enforce specific performance of an option contained in a lease of real property. The defendant lessor, June 5, 1935, leased land to a corporation, for three years from July 1, 1935, the lease providing for an extension of three additional years at the lessee's option, the option having been exercised. During the second threeyear term, the lessee assigned the lease to the plaintiff in the action. Paragraphs Nos. 21 and 22 of the lease read as follows:

"`Lessor reserves the right to sell said premises during the second three years or the extended three years provided for in section 20, and should the lessor during said term determine to sell the same, it agrees to give to the lessee the first right and option to purchase said premises at the same price at which the lessor is willing to sell to any third person. Provided that said Lessee shall exercise its right to buy within 30 days after being notified in writing as herein provided by the Lessor of its intention to sell, and in the event said Lessee fails to exercise said right to buy within said thirty day period said Lessor may sell said premises to such third person and said lease shall be thereupon terminated and the Lessor released from all its terms, covenants and conditions. But the Lessee will then have sixty days time to vacate, from date of sale.

"`During the life of this lease, or any extension thereof, Lessor will not sell said premises to any person, firm or corporation dealing in petroleum products.'"

During the month of June, 1940, the then lessee requested an extension, which defendant refused. December 23, 1940, defendant notified plaintiff that it had sold the property, requesting that possession be surrendered, June 30, 1941, being the terminal date of the extended lease.

The plaintiff then notified defendant that it elected to purchase the property and brought suit for the purpose of enforcing its option. In affirming the judgment of the trial court in favor of defendant lessor, this court said:

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"Paragraph 21 contains a number of specific provisions: (a) That the lessor reserves the right to sell the property during the second three years or the extended three-year period; (b) that, in the event that the lessor determines to sell, the lessee should have the first right and option to purchase; (c) that, in the event that the lessor determines to sell, the lessee would be given thirty days' notice in writing in order that it might exercise the option to purchase; (d)that, if the lessee did not exercise its right to purchase within thirty days after being notified in writing of the lessor's intention to sell to a third person, the lease should thereupon be terminated; and (e) that the lessee in that event should have sixty days' time from the date of the sale to vacate the premises."

The court then discussed the respective contentions of the parties, stating that appellant argued that, pursuant to paragraph No. 21 of the lease, supra, the respondent lessor had no right

". . . to sell the property to any person during the term of the lease, even though the purchaser was to take possession after the expiration of the lease. The respondent contends that paragraph 21 only had reference to a sale during the term of the lease as extended, and it could not render of the premises on the part of the lessee. It seems clear to us that the intention of the parties was in accord with the contention of the respondent. The appellant had no interest in a sale which would not disturb its possession during the term of the lease as extended, and it could not be in any way affected by such a sale.

"Cases holding that, where an option has been inserted in the lease giving the lessee the right to purchase, but containing no provision with reference to the surrender of the premises during the term of the lease, the option is enforcible, have no application to the situation presented in this case.

"The superior court correctly construed the lease as covering only a sale that would disturb the possession."

The judgment appealed from in favor of respondent was affirmed.

Of course, in the case at bar, the option in appellant's favor was effective, if and when the respondent decided to sell subject to appellant's lease. The case cited is not here controlling, the court having taken care to state the

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particular facts upon which it based its decision, those facts differing in an essential particular from the facts in the case at bar. The opinion distinguishes the case from the case at bar.

In the lease before us, the clause "subject to this lease," referring to appellant's option to purchase, has a definite application to appellant's rights.

In 51 C. J. S. 632, § 80, appears the following:

"According to some authorities, the lessee's preferential right to purchase the property is independent of the continuance of the lease under the new lessor, and the lessee does not lose his right by the fact that a sale by the lessor would not terminate the lease or that the purchaser is willing to continue it. On the other hand, it has been held, particularly under clauses indicating such result to be the intention of the parties, that a lessee's first privilege of purchasing does not apply to a sale made subject to the rights of the tenant to remain in possession to the end of his lease, and that it has reference only to a sale during the term of the lease which would involve cancellation of the lease and surrender of the premises on the part of the lessee."

In the absence of the clause, it might possibly have been contended that if respondent had received an offer to purchase the properties and accorded to appellant the right to purchase at the price offered, which offer appellant declined, and that if respondent then sold the properties, appellant's lease should be held to have terminated, or, on the other hand, that respondent might have sold the properties subject to the lease without according appellant its right to exercise its option to purchase at the price offered to respondent. Levy v. Peabody, 238 Mass. 164, 130 N. E. 261; Miller v. Compton, 185 S. W. (2d) 754; Garetson v. Hester, 57 Cal. App. (2d) 39, 133 P (2d) 863.

Of course, no question such as those above suggested is before us. However, the option clause in the lease implies a definite right in respondent to sell the properties subject to the lease (which right respondent would enjoy if the agreement between the parties did not provide that respondent should not sell) and is not merely a condition limiting appellant's option in case of a decision by

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respondent to sell during the term of the lease by excluding from its operation a sale not expressly made subject to the lease. Conditions precedent are not favored by the courts. 3 Williston on Contracts 1906, § 663; also, p. 1909, § 665.

Nor was the clause intended to exclude appellant from the operation of the option if respondent, during the term of the lease, should decide to sell to another, the actual transfer of title to be consummated after the expiration of the lease.

If respondent had decided to accept an offer from a third party for the properties six months or any other period prior to the expiration of the term of the lease, merely postponing the accomplishment of the sale until after the expiration of the term, appellant's right to the exercise of its option would have accrued at the time respondent decided to sell.

Respondent's contention, that the option granted to appellant became operative only if respondent should decide to sell subject to the lease, would be meaningless if respondent had that right in any event.

Respondent argues that appellant's option should become effective only if there was a sale subject to the lease. We have cited authorities to the effect that such an option is not effective if the lessor sells the property subject to the lease.

It is not here necessary to express any opinion as to whether these authorities state the majority rule. In the case at bar, it is reasonable to suppose that the parties, in drafting the lease agreement, agreed that the option should be effective even in case of a sale by respondent subject to the lease.

[5] Under all of the circumstances present in the case at bar, we hold that it was respondent's obligation to give appellant notice of any decision on its part to sell the demised premises during the period the lease agreement was in full force and effect, regardless of whether respondent expected to actually convey the premises prior to the expiration of the lease agreement. Respondent was obligated to advise

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appellant of the fact that it had decided to sell, whether it reached that decision a year or a day prior to the expiration of the lease.

Manifestly, what appellant desired was a preferential right to purchase at a price satisfactory to respondent for a conveyance of the premises, no matter when respondent should make its decision to sell. Such a right was of importance to appellant, and might well be to appellant of great value, all depending, of course, upon the price at which respondent should decide to sell.

If it appears from the evidence that respondent did decide to sell or was willing to sell, at a price (as stated in the lease), prior to the expiration of the lease, and did not advise appellant of its decision, respondent breached the terms of its agreement.

It is necessary to determine whether, during the existence of the lease, respondent corporation decided to sell the demised properties, thereby rendering appellant's option effective, and, if such a decision was reached, whether it was made by persons who had authority to reach such a decision.

William T. Gardiner was, without question, the principal representative of respondent in its relations with appellant. The record discloses that, in the spring of 1946, it was decided by respondent's officers and managers that it would be advisable to sell the leased properties, if a satisfactory price could be obtained. Respondent offered to sell to appellant at an asking price of $2,500,000, which offer appellant refused.

During the month of October, 1946, the evidence discloses that the board of directors of New Jersey Pacific (the parent corporation) was willing to sell to Smith for $2,050,000. No notice of respondent's willingness to sell at this figure was given to appellant. Smith was unable to produce a buyer at the figure referred to, and negotiations were conducted with McEachern and others representing General Construction Company and eastern parties, referred to as "Kaiser interests."

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The crucial question to be determined is whether or not, prior to the termination of the lease, December 31, 1946, respondent decided to sell at the price of $1,250,000. It is evident that, during the month of December, a bona fide offer by responsible parties to buy at the price mentioned was made to respondent. Respondent, of course, contends that there was no decision to accept this offer prior to the expiration of the lease, and Messrs. Gardiner and Windisch so testified.

In Webster's New International Dictionary (2d ed.), 680, the word "decide" is defined as meaning "to bring to a state of decision."

In The Oxford Dictionary, the word "decide" is defined as "to bring to a decision or resolve. To come to a conclusion, make up one's mind, resolve."

[6] Such a decision or determination on the part of one or more persons can frequently be proven only by circumstantial evidence.

In 31 C. J. S. 880, Evidence, § 178, appears the following:

"When the motive, intent, or knowledge of a person is pertinent to the issues in the case, the evidence to prove such matters must be relevant. Such matters are seldom capable of direct proof, and they may be proved by evidence as to the character or conduct of the person, or by other circumstantial evidence."

In 32 C. J. S. 1099, Evidence, § 1039, is found the following:

"Any issue may be proved by circumstantial evidence, or by a combination of direct and circumstantial evidence. A well connected train of circumstances is as cogent of the existence of a fact as any array of direct evidence, and may outweigh opposing direct testimony; and the concurrence of well authenticated circumstances has been said to be stronger evidence than positive testimony unconfirmed by circumstances."

After Mr. Gardiner finally became convinced that Smith could produce no purchaser, the former and other officers of respondent again negotiated with representatives of the "Kaiser interests," well knowing that the price those

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persons would pay was much less than the price which Smith had hoped to offer.

Mr. Gardiner visited Seattle during the month of November, and then stated to Mr. Reitze (as the latter testified)that negotiations with Smith had been discontinued, that he, Gardiner, was "free as a bird." There is testimony to the effect that he informed Mr. McEachern that Mr. Windisch, accompanied by Mr. Seward, the company's counsel, would be in Seattle early in December, with authority to negotiate concerning the cement properties, and with full authority to speak for Mr. Gardiner concerning all matters connected with New Jersey Pacific.

Messrs. Windisch and Seward went to Seattle, and, December 10th, negotiations with McEachern resulted in the latter's offer to pay $1,250,000, the offer to be good until January 1, 1947. This was the offer finally accepted by respondent, and it is difficult to believe that respondent's representatives, who had gone to Seattle for the express purpose of attempting to procure an offer for the properties, merely received the offer, which they knew was a final one, without making any statement as to their purpose to recommend acceptance of the offer to the corporate authorities in New York. Evidently respondent was not only willing, but was anxious to sell. In this connection, it must be remembered that Mr. Windisch had been in frequent contact by telephone with Mr. Gardiner while these negotiations in Seattle were in progress.

The record does not indicate that, prior to the termination of the Seattle negotiations with McEachern, December 10th, Smith had again opened negotiations on behalf of anyone, or that, on the date mentioned, it was contemplated that Smith would be again heard from.

Mr. Smith testified that, sometime prior to the middle of December, a representative of respondent had told him, in effect, that he was out of the picture. He testified that, December 14th, he telegraphed Mr. Gardiner he was endeavoring to interest some people in a deal. December 16th, Mr. Gardiner telegraphed Smith to the effect that he had no

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definite information "justifying denial of statement that you were out." Smith and one of his associates, Paul Kerfoot, then telephoned Gardiner, taking turns talking to him. Smith testified that Gardiner told him that a deal had already been made and was before the board of directors for acceptance. Kerfoot testified that Gardiner told him that he could do nothing, as the matter was out of his hands.

Mr. Gardiner denied having made any such statements. Kerfoot also testified that Mr. Gardiner, however, stated that he might be able to consider a deal for an exchange of bank stock. No definite offer was ever made along the lines suggested, and, apparently, nothing further of importance transpired in connection therewith.

If there was no understanding or agreement, as respondent contends, on the part of those negotiating on behalf of respondent, it is difficult to understand why Mr. Windisch deemed it important to ask that the offer be extended until January 10, 1947. That those acting on behalf of respondent had no real belief that Smith might succeed in producing a better offer than Mr. McEachern's is strongly indicated, if not demonstrated, by communications between Seattle representatives of respondent and Mr. Gardiner.

A meeting of the board of directors of New Jersey Pacific was held at New York, December 19, 1946. Mr. Gardiner presided, and Mr. Windisch was present. After considering matters not pertinent to this inquiry, the minutes contain the following paragraph:

"The Chairman reported that the committee appointed to consider and make recommendations concerning the disposition or future operation of the plant, quarry and related properties of Pacific Coast Cement Company and of the Steamship `Diamond Cement' owned by Pacific Coast Coal Company was not yet able to make its recommendations."

Mr. Gardiner testified he thought no other reference was made at the meeting to the negotiations for the sale of respondent's properties, and that he made no other statement or report to the directors concerning the same. He testified that he had probably discussed the matter with some of the directors, but not with Mr. Brooks. the witness stating, "I

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didn't talk to Brooks unless necessary." Mr. Gardiner also testified that there were no other communications or negotiations between General and New Jersey Pacific, the former's offer having been a "take-it-or-leave-it proposition." The witness also testified that "we discussed whether we would form a counteroffer, but we never submitted one."

It appears beyond question that respondent's officers and the directors generally were fully advised during the month of December, 1946, of the fact that General had made a definite offer for respondent's properties in the amount stated, and it is impossible to believe that the officers and directors of the corporations concerned, including respondent, had not decided to accept General's offer, save in the happening of the very remote possibility that some better offer might materialize.

Pursuant to the provisions of the lease agreement with appellant, the latter then was entitled to be advised concerning the situation as it then stood.

It is significant that the minutes of the meeting of the directors of New Jersey Pacific, held after Mr. Windisch had returned to New York, contained nothing more than the usual statement that the committee in charge of the negotiations for the sale of the properties was not yet ready to recommend any definite action. The minutes contain no mention of the offer submitted by McEachern, nor of the possibility that an acceptable offer might be made through Smith. Mr. Gardiner testified that the committee's activities were not discussed at the meeting. From the testimony, it seems probable that it was discussed with other directors, with the exception of Mr. Brooks, one of the directors present at the meeting. From Mr. Brooks' testimony, it is evident that he was not in favor of leaving appellant out of the picture, and that the other persons concerned were anxious to deal with the interests represented by McEachern, unless a better offer should materialize.

Mr. Brooks testified that, at the meeting of the directors, held January 6, 1947, when the offer made by General to purchase the properties was formally accepted, Mr.

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Gardiner stated that General's offer was not formally brought before the board at an earlier date because New Jersey Pacific was obligated to notify appellant if any offer to purchase was made prior to December 31, 1946. It must, of course, be noted that Mr. Gardiner denied that any such statement was made.

It is, of course, true that respondent was not under any obligation to anyone to sell the properties. It is, however, perfectly clear that respondent desired to sell and, after December 31, 1946, the properties were in respondent's possession and the business operations were in respondent's hands. It is evident that respondent, with good reason, was anxious to turn the properties over to a purchaser as soon as possible.

It must always be remembered that it was not a formal acceptance of an offer to purchase which, pursuant to paragraph No. 32 of the lease agreement, would obligate respondent to afford to appellant an opportunity to exercise its first option and privilege to purchase. Pursuant to the language of the lease, respondent's decision to sell and willingness to accept an offer obligated respondent to give appellant a notice, as called for by the agreement.

[7] The evidence shows beyond question that, during the month of December, 1946, the members of the committee in charge of the negotiations for the sale of the properties, with full authority to act, had definitely reached the conclusion that the offer made on behalf of General should be accepted, subject to the remote possibility that a better offer might be made. By the terms of the lease agreement, the committee were obligated to so advise appellant. It is evident that they did not do so because, for some undisclosed reason, they preferred to sell to General and were of the opinion that, if the formal acceptance of General's offer should be delayed until after December 31st, appellant's rights to the exercise of its first option would be foreclosed. Time Oil Co. v. Palmer, 28 Wn. (2d) 272, 182 P. (2d) 695; Burleigh v. Mactier, 108 Atl. (N. J.) 84; Driebe v. Fort Penn Realty Co., 331 Pa. 314, 200 Atl. 62; Peerless Department Stores v.

212 SUP'R PORT. ETC. v. PAC. COAST ETC. [33 Wn. (2d)

George M. Snook Co., 123 W. Va. 77, 15 S. E. (2d) 169; 3 Williston on Contracts (Rev. ed.) 1952, § 677.

The next question to be determined is whether or not the decision to sell, reached by the board of directors of New Jersey Pacific or the committee appointed by that board, was binding upon respondent.

[8] Generally speaking, respondent, as a corporation, could transact business only through its board of directors or by direct action of its stockholders. Rem. Rev. Stat. (Sup.), § 3803-31; Trethewey v. Green River Gorge, 17 Wn. (2d) 697, 136 P. (2d) 999; Lycette v. Green River Gorge, 21 Wn. (2d) 859, 153 P. (2d) 873.

This rule, however, is subject to certain qualifications:

[9] (1) It is a well-recognized principle of law that a corporation may not be used as a cloak or disguise to escape corporate liability, and that the corporate veil may be pierced when necessary to do justice in particular cases. Platt v. Bradner Co., 131 Wash. 573, 230 Pac. 633; State v. Davies, 176 Wash. 100, 28 P. (2d) 322; National Bank of Commerce of Seattle v. Dunn, 194 Wash. 472, 78 P. (2d)535; Dummer v. Wheeler Osgood Sales Corp., 198 Wash. 381, 88 P. (2d) 453; 1 Fletcher, Cyclopedia Corporations (Perm. ed.) 134, § 41; Ballantine, Private Corporations (1927) 26, § 6; 18 C. J. S. 376, § 6.

(2) The foregoing principle, requiring that a corporate entity on occasion be disregarded, is especially applicable in cases involving a parent or principal corporation and subsidiary corporations which merely acquiesce in and register the decrees of their principal.

"The rule followed in many cases is that the legal fiction of distinct corporate existence may be disregarded where a corporation is so organized and controlled, and its affairs are so conducted, as to make it merely an instrumentality or adjunct of another corporation. The courts will ignore separate corporate entities in order to defeat a fraud, wrong, or injustice, at least where the rights of third persons are concerned." 18 C. J. S. 382, § 7e.

"If one corporation so dominates and controls another as to make that other merely an adjunct to it, the courts will

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look beyond the fiction of distinct corporate entity. Briggs & Co. v. Harper Clay Products Co., 150 Wash. 235, 272 Pac. 962. So, too, where a private person so dominates and controls a corporation that such corporation is his alter ego, a court is justified in piercing the veil of corporate entity and holding that the corporation and private person are one and the same." State v. Davies, 176 Wash. 100, 28 P. (2d) 322.

See, also, 1 Fletcher, Cyclopedia Corporations (Perm. ed.)154, § 43; Seattle Ass'n of Credit Men v. Daniels, 15 Wn. (2d) 393, 130 P. (2d) 892.

[10] (3) In cases when it appears that a corporation has vested an officer or officers or agents with apparent authority to transact certain business affairs, the corporation will be estopped to deny the authority of its chosen representatives and to repudiate their acts.

In Ballantine, Private Corporations (1927) 347, § 110, the rule is stated as follows:

"A corporation is subject to the same extent as a natural person to the general principle that one who holds out another, or allows him to appear as having authority to act, as his agent with respect to his business generally, or with respect to a particular matter, is estopped, as against persons dealing with him in good faith, to deny that his apparent authority is real. If a corporation, therefore, or its directors, either intentionally or negligently, clothe a particular officer or agent with an apparent authority to act for it in a particular business or transaction, and persons deal with him in good faith, it will be bound to the same extent precisely as if such apparent authority were real. In such a case, the corporation cannot set up secret instructions or rules limiting the apparent authority of its agent."

[11] It is also the rule that, although directors or trustees act as a board at regularly called meetings of the corporation, those they represent may be estopped to question the authority of their officers when acting less formally, if there has been a custom or usage to act more informally. National Bank of Commerce v. Puget Sound Biscuit Co., 61 Wash. 192, 112 Pac. 265; 2 Fletcher, Cyclopedia Corporations 176, § 394.

[12] The same principle applies concerning actions by an executive committee of a corporation. Although such a

214 SUP'R PORT. ETC. v. PAC. COAST ETC. [33 Wn. (2d)

committee can act only through a majority of its membership, where one member of such a committee of three acts for the corporation and another member acquiesces, in such acts the corporation is bound if the committee had authority to act for the corporation. 2 Fletcher, Cyclopedia Corporations 432, § 552.

Concerning the actions of the committee of three appointed by the directors of New Jersey Pacific, the case of Roebling's Sons Co. v. Barre and Montpelier Traction &Power Co., 76 Vt. 131, 56 Atl. 530, is of interest.

Respondent owned the "Diamond" plant and the Dall Island quarry, but had not operated the properties since 1931, the date of the lease to appellant. New York Pacific owned the steamship "Diamond Cement," which was used to transport the product of the quarry to Seattle. Florida Cement owned respondent's stock. New Jersey Pacific owned ninety-three per cent of the stock of Florida Cement, controlling that corporation by its stock ownership and thereby, by completely effective, though indirect, control, conducting respondent's business. New Jersey Pacific also, by stock ownership, controlled New York Pacific.

All of these corporations shared a Seattle staff and offices in common. Respondent paid to New Jersey Pacific annually a certain proportion of the operating costs. All questions concerning respondent's business and its policy were determined by New Jersey Pacific. Apparently, the trustees or directors of respondent functioned pursuant to instructions from the directors of New Jersey Pacific.

The lease agreement between appellant and respondent was negotiated on respondent's behalf largely by Mr. Gardiner, the chairman of New Jersey Pacific's board of directors. Apparently, Mr. Gardiner, at all times after the effective date of the lease, save probably during the period he was absent in Europe, was consulted in all important business matters between appellant and respondent.

Probably, at all times after the execution of the lease, respondent's board of directors functioned only nominally

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and as an echo for the board of directors of New Jersey Pacific.

In 1946, Mr. Gardiner negotiated with appellant concerning an extension of the lease or a sale of the properties covered thereby, and when appellant was not interested in extending the lease or in purchasing the properties at the price quoted by Mr. Gardiner, the latter sought to interest other persons in a purchase. When New Jersey Pacific appointed a committee of three to negotiate with any interested parties concerning the liquidation of the "package," Mr. Gardiner was the principal mover in the matter and evidently dominated the committee. When, in December, 1946, Mr. Gardiner was unable to visit Seattle, he requested Mr. Windisch, a member of the committee, to go to Seattle and, apparently, Mr. Windisch went to Seattle with full authority to act for Mr. Gardiner and New Jersey Pacific. It does not appear, and it is not contended, that, in the course of the negotiations during 1946, the board of directors of respondent, or any member of that board as such, had anything to do with the negotiations conducted by Mr. Gardiner or any member of the committee selected by the board of directors of that corporation. The latter committee at all times represented respondent, the legal owner of the cement plant and the quarry.

[13] After careful consideration of the record before us, we hold that, during the month of December, 1946, respondent had decided to sell the "premises" which it had leased to appellant, as described in paragraph No. 32 of the lease agreement, and had determined the price, terms, and conditions at which it was, at that time, willing to sell the same. Respondent, of course, had repeatedly offered to sell the properties to others and, beyond question, had decided to sell the properties at a price much lower than that which respondent had quoted to appellant. The record clearly shows that, during the month of December, 1946, respondent had decided to sell the properties to General at the price which the latter had offered.