Beit v. Beit

This case involves issues as to the right of the vendors of an interest in a business to a declaratory judgment that a covenant in restraint of trade contained in bills of sale executed to carry out the bargain is unreasonable and unenforceable, and as to the conclusion of the trial court that it is illegal. From a judgment for the plaintiffs the defendant has appealed.

The finding, in which no material correction can be made, may be summarized as follows: The plaintiffs, husband and wife, were in partnership with the husband's two brothers and their wives. The partnership operated three stores. Two were large stores, one in New London and one in Norwich, engaged in the sale of groceries, fruits, vegetables, meats and dairy products, principally by self-service and on a cash-and-carry basis. The third store was in Norwich and was engaged only in the sale of meats. No wholesale business was done by the partnership, but large sales were made to some hotels and restaurants at a discount. The customers of the stores were almost exclusively residents of New London and the towns contiguous thereto and of Mystic and Norwich and the towns contiguous thereto. The partnership had no special brands or exclusive rights to sell products. It carried the same general line of merchandise as did other competitive stores of a like nature, of which there were a number within New London county but outside the area served by the stores of the parties. We take judicial notice that the area of New London county is about 695 square miles, that ten of its twenty-one towns are not contiguous either to Norwich or to New London, and that the area of the ten comprises almost 60 per cent of the area of the county.

The plaintiffs sold their interest in the business to a son of one of the brothers, and to carry out the transaction each of the plaintiffs executed two bills of sale dated October 23, 1945. All the instruments contained a clause as follows: "I further expressly covenant and agree with this vendee, his heirs and assigns not to engage in the meat market or grocery business within the limits of New London County, Connecticut, for a period of thirty years, from this day." Previous to the sale the parties had not discussed the inclusion in the bills of sale of such a covenant, but the attorney for the partnership who drafted the bills inserted the covenant thinking that it would meet with the desire of the parties to do so and basing the provisions on what he believed would be fair and reasonable; nor was the covenant discussed when the instruments were executed. Later the plaintiff Max protested its inclusion, but this was upon a misunderstanding as to its purport, and when its effect was explained to him he expressed himself as satisfied with it, stating that neither he nor his wife intended ever to engage again in a business similar to that theretofore conducted by the partnership. Before bringing this action, however, he entered into negotiations to purchase a grocery and food business in the town of East Lyme, a town in New London county but not contiguous to either Norwich or New London. When advised by the attorney who drafted the bills of sale that carrying on such a business would violate the covenant quoted above, he desisted from the negotiations, although otherwise he would have made the purchase. The plaintiff Max desires to engage in the retail grocery and meat business in New London county. This action was brought by writ dated October 24, 1946; and, while in the complaint as amended the plaintiffs sought both a judgment declaring the covenants illegal and to have the bills of sale corrected so as to omit them, the trial court granted no relief other than a declaratory judgment.

We are met at the outset with the question whether the plaintiffs are entitled to maintain an action seeking a declaratory judgment as to the legality of the covenant. The reason why such covenants are held to be unenforceable is that unless they meet certain criteria they constitute a restraint upon trade which is against public policy. Styles v. Lyon, 87 Conn. 23,26, 86 A. 564; May v. Young, 125 Conn. 1, 5,2 A.2d 385; 119 A. L. R. 1445. A court will not grant any relief to a plaintiff who rests his claim upon an agreement which is against public policy, for that would be to lend its aid to an illegal transaction. Smith v. David B. Crockett Co., 85 Conn. 282, 287, 82 A. 569; Roberts v. Criss, 266 F. 296, 301; 2 Page, Contracts (2d Ed.) 1026. It is sometimes stated generally that the courts will not grant affirmative relief to the promisor in such a covenant by way of rescission or the like. Manchester L. R. Co. v. Concord R. Co.,66 N. H. 100, 102, 20 A. 383; 36 Am.Jur. 655. Where, however, the invalidity of the agreement is based on the fact that it is against public policy, we have found only one decision which directly denies such relief to a promisor, and in that case it was pointed out that no public interests were involved. National Harrow Co. v. Hench, 76 F. 667, 670. On the other hand, it has been held that in a proper case equity will grant relief of that nature to the promisor on the ground that the agreement is against public policy. Duval v. Wellman,124 N.Y. 156, 160, 26 N.E. 343; Cox v. Donnelly,34 Ark. 762; 3 Pomeroy, Eq. Jur. (5th Ed.) 941. Where a promisor in such an agreement seeks to have equitable relief based upon its illegality, the situation is very different from that presented where the promisee seeks to enforce it, for the promisor is not seeking to put it into effect but rather is asserting and furthering the public policy of the state. "The remedy of cancellation is simply the equitable proceeding identical with the setting up of the illegality as a defense to defeat a recovery at law, and thus get rid of the contract as a binding executory obligation." Missouri, K. T. Trust Co. v. Krumseig, 77 F. 32, 42, 23 C.C.A. 1.

To permit a party who has voluntarily entered into such an agreement, for a valuable consideration perhaps in large part based on it, to escape the consequences of his acts, as is illustrated in this case, smacks of unfairness and savors of an encouragement to dishonesty. But the reason for permitting a promisor to prove the invalidity of the agreement was long ago stated by Lord Mansfield in Holman v. Johnson, 1 Cowp. 341, 343, when he said: "The objection, that a contract is immoral or illegal as between plaintiff and defendant, sounds at all times very ill in the mouth of the defendant. It is not for his sake, however, that the objection is ever allowed; but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, by accident, if I may so say." See Funk v. Gallivan, 49 Conn. 124, 128. To the contention that a defense against the enforcement of such an agreement by one who has received a valuable consideration is unconscionable, the Supreme Court of Illinois has said: "The answer to this is that in a situation of this kind the interest of the public, rather than the equitable standing of individual parties, is of determining importance. The defense is not here allowed because the party raising it is entitled to any consideration, but upon principles of public policy and to conserve the public welfare." Parish v. Schwartz,344 Ill. 563, 572, 176 N.E. 757. Speaking of the application of the principle that one who is a party to a fraudulent contract may defend against its enforcement on the ground of the fraud, the Supreme Court of Michigan states: "Quite likely at first blush we react against such a rule. A deeds to B his farm to defraud his creditors with an agreement that B shall reconvey when requested. We do not admire the sportsmanship of B when he refuses to reconvey, and it may be that we are reluctant to refuse specific performance to A. But if the rule were otherwise, it would be an open invitation to all kinds of fraudulent contracts." Leland v. Ford, 245 Mich. 599, 610,223 N.W. 218; see 5 Williston, Contracts (Rev. Ed.) p. 4562. Indeed, if a defendant were forbidden to defend against the enforcement of a contract as against public policy because he had received a consideration, there would be few cases where that defense could be made.

Professor Borchard cites several cases to support his statement that a promisor is entitled to a judgment that a covenant he has made is unenforceable as against public policy. Borchard, Declaratory Judgments (2d Ed.) p. 515. In most of these cases the courts did render judgment holding the agreements to be illegal, but without discussing the question whether to do so falls within the proper field of declaratory judgments. See also Ertel Bieber Co. v. Rio Tinto Co., [1918] A. C. 260, 275. Where a promisor seeks a declaratory judgment that a covenant he has made is unenforceable as against public policy, the case is stronger than it is where he seeks affirmative relief. Implied in his action is a willingness on his part to abide by the covenant if it is found to be legal; and if the court finds it not enforceable the public policy to which it runs counter is thereby maintained. If the fact that a promisor has received a valuable consideration does not preclude him from defending against the enforcement of a contract because it is against public policy, or from seeking affirmative relief against it by way of cancellation or the like, we cannot see why that fact should preclude him from seeking a declaratory judgment to determine whether or not it is an enforceable agreement. If the other conditions requisite for granting relief are present, there is no reason why he should not have a declaratory judgment as to the validity of the agreement. See Schaefer v. First National Bank, 134 Ohio St. 511, 519,18 N.E.2d 263. In the instant case a declaration that the covenant is unenforceable will determine the right of the plaintiffs to establish a grocery business within the area included in the agreement, and the parties are not left in uncertainty as to their rights, with the ultimate solution only to be reached when the plaintiffs have incurred expense in starting a business and the defendant has brought an action for an injunction or damages. Sigal v. Wise, 114 Conn. 297, 301,158 A. 891; Sage-Allen Co. v. Wheeler, 119 Conn. 667, 673,179 A. 195.

The complaint in this case, it is true, affirmatively alleged that the covenant in question constituted an unreasonable restraint of trade, and the pleading was addressed rather to the affirmative relief the plaintiff was seeking than to a prayer for a declaratory judgment. It did not accord in certain respects with a proper complaint seeking a declaratory judgment. Practice Book 250, 251, Forms No. 497-499. The only claim the defendant makes in this connection is, however, that there was no actual bona fide and substantial issue in dispute between the parties but only an academic question. The trial court reached a contrary conclusion. This is supported by the finding that the plaintiff Max had entered into negotiations to purchase a grocery and food business and had only desisted when advised that it would be contrary to the covenant in question to carry on the business, and by the finding that he desires to go into the retail grocery and meat business in the county. In view of these facts, together with the denial by the defendant of the allegation in the complaint that the covenant constituted a bargain in unreasonable restraint of trade, and the whole course of procedure at the trial and before us, the trial court's conclusion is amply supported.

We cannot hold that the trial court could not properly reach the conclusion that the covenant constituted a restraint of trade which was greater than was necessary for the protection of the business of the defendant, which imposed an unnecessary hardship upon the plaintiffs and which was unreasonable. Styles v. Lyon, 87 Conn. 23, 26, 86 A. 564; Samuel Stores, Inc. v. Abrams, 94 Conn. 248, 253, 108 A. 541; May v. Young, 125 Conn. 1, 5, 2 A.2d 385; Sivley v. Cramer, 105 Miss. 13, 61 So. 653; Herreshoff v. Boutineau,17 R.I. 3, 7, 19 A. 712; Restatement, 2 Contracts, 515, p. 990, illust. 2; 5 Williston, Contracts (Rev. Ed.) 1636. The defendant claims, however, that the trial court should at least have held it valid with respect to Norwich, New London and the towns contiguous thereto. In Samuel Stores, Inc. v. Abrams, supra, we had before us a covenant in an agreement for the employment of a manager of a clothing store that he would not become connected, for a period of five years after the employment ceased, with any firm engaged in a business similar to that of the employer which would compete with the latter's business. The employer had stores in several cities. We stated (p. 255) that the agreement included a number of cities in which the manager, from his employment in one city, could have had no acquaintance with the local customers; and we held the covenant to be unreasonable and unenforceable, making no distinction between the city where the manager had been employed and other cities included in the agreement. An examination of the record and briefs in that case discloses, however, that no claim that the agreement was divisible was made. In Torrington Creamery, Inc. v. Davenport, 126 Conn. 515, 12 A.2d 780, we had before us a covenant in an agreement of employment in which the defendant agreed not to engage in the same business as that of the employer plaintiff in several named towns in Litchfield county, in one of which the defendant had been in charge of the plaintiff's business. The plaintiff only sought to enforce the agreement in that town and an adjoining town served by the same branch of its business. Although pointing out that enforcement was sought only in the two towns where the defendant had special knowledge of the plaintiff's customers, we said (p. 520) that the contract by its terms was divisible. While the statement was unnecessary to the decision, there is much authority to the effect that in such a situation the covenant often may be interpreted to be severable as regards the various places named. 5 Williston, op. cit., 1659.

Whether the promises in a contract will be treated as severable or not is primarily a matter of the intent of the parties, determined by a fair construction of all the provisions of the contract. Bridgeport v. T. A. Scott Co., 94 Conn. 461, 465, 109 A. 162; Trenton Potteries Co. v. Oliphant, 58 N.J. Eq. 507, 517, 43 A. 723. There is undoubtedly a strong tendency on the part of courts to regard as divisible restraints of trade which are unreasonable in the extent of area covered and to hold them invalid only so far as necessary for the protection of the covenantee, where the terms of the promise permit that to be done without clearly violating the intent of the parties. 5 Williston, op. cit., 1659; Restatement, 2 Contracts, 518. Professor Williston advocates a broader rule to the effect that, even though a covenant in restraint of trade was regarded by the parties as indivisible, it should be given effect to the extent to which the court finds that it would not be unenforceable. 5 Williston, op. cit., 1660. This proposition finds support in a line of Massachusetts cases of which the earliest seems to have been Edgecomb v. Edmonston, 257 Mass. 12, 19,153 N.E. 99, and the latest, Metropolitan Ice Co. v. Ducas, 291 Mass. 403, 405, 196 N.E. 856, and in a few decisions elsewhere. Hill v. Central West Public Service Co., 37 F.2d 451, 452; Davey Tree Expert Co. v. Ackelbein, 233 Ky. 115, 120, 25 S.W.2d 62. The difficulty with that position is that it gives effect to the conclusion of a court as to the extent to which a covenant unreasonably broad in its terms can in fairness and equity be enforced rather than to the intent of the parties, who, had they desired a narrower provision, should have agreed upon it. See Davies v. Davies, 36 Ch. D. 359, 387, 393; S. V. Nevanas Co. v. Walker Foreman, [1914] 1 Ch. 413, 424. In Pollock, Contracts (11th Ed.), page 335, the rule is stated as follows: "A restrictive covenant which contains or may be read as containing distinct undertakings bounded by different limits of space or time, or different in subject-matter, may be good as to part and bad as to part. But this does not mean that a single covenant may be artificially split up in order to pick out some part of it that can be upheld. Severance is permissible only in the case of a covenant which is in effect a combination of several distinct covenants." Where the covenant is intended by the parties to be an entirety, it cannot properly be so divided by a court that it will be held good for a certain area but invalid for another; indeed, as the trial court well states in its memorandum of decision, this would be to make an agreement for the parties into which they did not voluntarily enter. British Reinforced Concrete Engineering Co., Ltd. v. Schelff, [1921] 2 Ch. 563, 572; Mason v. Provident Clothing Supply Co., Ltd., [1913] A. C. 724, 745; Consumers' Oil Co. v. Nunnemaker,142 Ind. 560, 568, 41 N.E. 1048; Wisconsin Ice Coal Co. v. Lueth, 213 Wis. 42, 47, 250 N.W. 819; Kex Mfg. Co. v. Plu-Gum Co., 28 Ohio App. 514, 519,162 N.E. 816; 2 Page, Contracts (2d Ed.) p. 1389. In the instant case there can be no doubt that the parties intended the covenant to apply to all of New London county, not to a portion of it left wholly indefinite by the terms of the agreement. The trial court correctly so concluded.

There is no error.

In this opinion JENNINGS and DICKENSON, Js., concurred.