Illinois Controls, Inc. v. Langham - Ohio Supreme Court Opinion - Ohio Supreme Court Decision

	ROMINGER LEGAL
		Ohio Court Cases and Opinions - Ohio Legal Research
					Need Legal Help?
					Need Legal Help?
LEGAL RESEARCH CENTER
LEGAL RESEARCH CENTER			LEGAL HEADLINES - CASE LAW - LEGAL FORMS	NOT FINDING WHAT YOU NEED? -RESEARCH

This court case was taken from the web sites of the Ohio Courts. Search our site for more cases - CLICK HERE

LEGAL RESEARCH

COURT REPORTERS

PRIVATE INVESTIGATORS

PROCESS SERVERS

DOCUMENT RETRIEVERS

EXPERT WITNESSES

Find a Private Investigator

Find an Expert Witness

Find a Process Server

Case Law - save on Lexis / WestLaw.

Legal News - Legal Headlines

OPINIONS OF THE SUPREME COURT OF OHIO
The full texts of the opinions of the Supreme Court of
Ohio are being transmitted electronically beginning May 27,
1992, pursuant to a pilot project implemented by Chief Justice
Thomas J. Moyer.
Please call any errors to the attention of the Reporter's
Office of the Supreme Court of Ohio. Attention: Walter S.
Kobalka, Reporter, or Deborah J. Barrett, Administrative
Assistant. Tel.: (614) 466-4961; in Ohio 1-800-826-9010.
Your comments on this pilot project are also welcome.
NOTE: Corrections may be made by the Supreme Court to the
full texts of the opinions after they have been released
electronically to the public. The reader is therefore advised
to check the bound volumes of Ohio St.3d published by West
Publishing Company for the final versions of these opinions.
The advance sheets to Ohio St.3d will also contain the volume
and page numbers where the opinions will be found in the bound
volumes of the Ohio Official Reports.

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
St. 3d .]
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 rela-
tionship 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 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.
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.
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.
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.
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.
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.
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 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.
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.
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.
"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.)
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 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.
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.
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.
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.
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.
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 marketing of BI's
products. This relationship between BI and CAT was precisely
the reason appellant sought an affiliation with appellees.
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.
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.
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.
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 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.
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.
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).
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 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.
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.
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.
Appellees appealed and appellants cross-appealed. On
September 28, 1992, the Eighth District Court of Appeals
reversed the judgment of the trial court entered on the jury
verdict and affirmed the judgment of the court excluding expert
testimony with respect to lost profits.
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
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.
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.
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. 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.
Appellees question Wood's applicability, contending that

mutuality of obligation is not an issue in the present case.
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.
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.
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.
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.
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.
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 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.
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.
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.
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.
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
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.
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.
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 to
the obligation if, after obtaining such capacity, the principal
manifests acceptance of the transaction. See id., Sections 104
and 84, Comment d.
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.
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.
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.
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 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
Appellees Clark Balderson and BI additionally question the
assessment of damages against them for breach of the agreement

by Illinois Controls.
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).
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.
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.
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.
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.
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 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
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
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.
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.
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
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
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
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.
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.
VI
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.
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.

FOOTNOTE:
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.