Shem, Ham, and Japheth orally agreed to start Ark Transportation (“Ark”), a business specializing in exotic sea adventures. Shem contributed $100,000 to Ark, stating to Ham and Japheth that he wanted to limit his liability to that amount. Ham, who had extensive travel expertise, contributed $50,000 to Ark. Japheth contributed no money to Ark but agreed to act as sales agent. Shem, Ham, and Japheth agreed that Ham would be responsible for designing the vacations, and that Japheth alone would handle all sales. Ark opened and quickly became successful, primarily due to Japheth’ effective sales techniques.
Subsequently, without the knowledge or consent of Shem or Japheth, Ham entered into a written sales contract in Ark’s name with WaterWorld, Inc. (“WaterWorld”) to sell specially designed submarine vacation packages at a price that was extremely favorable to WaterWorld. Ham’s sister owned WaterWorld. When Shem and Japheth became aware of the contract, they contacted WaterWorld and informed it that Ham had no authority to enter into sales contracts, and that Ark could not profitably sell the submarine vacation packages at the price agreed to by Ham. Ark refused to honor the agreement and WaterWorld sued Ark for breach of contract.
Thereafter, Shem became concerned about how Ham and Japheth were managing Ark. He contacted Noah, Inc. (“Noah”), Ark’s supplier of water craft. He told Noah’s president, “Don’t allow Ham to order any seagoing vessels; he’s not our sales person. That’s Japheth’s job.” Ham later placed an order for several expensive ships with Noah. Ark refused to pay for the ships, and Noah sued Ark for breach of contract. Not long afterwards, Ark went out of business, owing its creditors in excess of $12,500,000.
Question: How should payment on Ark’s debts be allocated? Discuss.
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