Anderson v. Kammeier

TODD, Justice

(dissenting).

I respectfully dissent from that portion of the majority opinion which affirms the trial court’s allowance of the rescission of the so-called “consultation agreement.” Certain facts must be considered in addition to those set forth in the majority opinion. At the December 1 reexecution of the purchase agreements, Anderson and Thompson executed the following guarantee of the consultation agreement:

“In order to induce G.R.K., Inc. to enter into the Management Consulting Agreement with Graduate Personnel, Inc., and in further consideration of the credit extended by G.R.K., Inc. to Graduate Personnel, Inc., the undersigned each personally guarantees the prompt payment and full and complete performance of the obligations of Graduate Personnel, Inc. according to the Management Consulting Agreement dated December 1, 1969.

“This Personal Guarantee is continuing whether or not each of the undersigned continues as an officer, director, stockholder or employee of Graduate Personnel, Inc.

“This Personal Guarantee is direct to G.R.K., Inc. and is not conditional or contingent upon any event.

“None of the undersigned shall be released from this Personal Guarantee until the total amount of $32,500.00 has been paid in full.

“The undersigned hereby sign this Personal Guarantee on December 1,1969 and bind their heirs and personal representatives to this obligation.

“/s/ DENNIS D. ANDERSON

“/s/ RICHARD P. THOMPSON”

The guarantee was to continue whether the guarantors remained with Graduate Personnel, Inc., or whether the company continued in business. Such a guarantee is totally inconsistent with the concept that the consulting services were what Graduate Personnel -needed or wanted. Thus, it is immaterial whether the revised agreement provided tax advantages to G.R.K., Inc.

The trial court expressly found that the documents executed on December 1, 1969, “were all integral parts of one transaction,” but nevertheless held that the management consulting agreement is severable from the transaction and that defendant’s breach justifies rescission of the management consulting agreement. As will appear below, this conclusion allows the tax form of the transaction to control the contractual substance, and in so doing, produces a result which is both inequitable and at odds with the parties’ evident conception of the transaction.

A superficial perusal of the case law produces both authority for treating the December 1 documents as an entire contract and authority for divisible treatment. There is admittedly ample support for the majority’s proposition that “[t]he distinguishing mark of a divisible contract is that it admits of apportionment of the consideration * * *.” At the opposite extreme are numerous decisions reiterating the familiar rule that “Instruments executed at the same time, for the same purpose, and in the course of the same transaction, are, in the eye of the law, one instrument, and will be read and construed together, unless the parties stipulate otherwise.”¹

In view of the incredible array of results courts have reached on the issue of contract divisibility, an observation made by Professor Corbin seems particularly astute (3A Corbin, Contracts, § 694, p. 281):

“Where [a] court in its opinion appears to use these terms [i. e., ‘entirety’ or ‘divisibility’] as a basis of decision, it is in truth deciding on the basis of those factors that it believes to constitute ‘entirety’ or ‘divisibility’ for the purpose in hand. The terms are in fact no more than attempts to describe a result already reached.”

The appropriate inquiry under a divisibility issue should therefore focus on the facts and circumstances of a particular transaction rather than relying on any mechanistic evaluation of the form of the documentation. A factual examination of this sort should reveal the true nature of a transaction as the parties conceived it, and any judgment on the divisibility issue should be consonant with the character so revealed.

In this case, it could scarcely be more obvious that the transaction which in fact occurred was the sale of a going business concern. No single one of the December 1 instruments would have been executed in the absence of the others.² 3A Corbin, Contracts, § 694, pp. 281 to 283. Anderson and Thompson were plainly not interested in obtaining only a lease, or office equipment, or consulting services. It was the business entity which they sought. As such, it is apparent that more than mere consulting services were received by plaintiffs in return for the $32,500 paid under the management consulting agreement.³ The going concern value or goodwill of ECI also changed hands under the guise of the consulting agreement.

Under these circumstances, it is unjust to sever the consulting agreement from the overall contract of sale and allow it to be rescinded by plaintiffs. Even though the district court judgment directs plaintiffs to return certain of defendant’s personal property used by the former under the consulting agreement, it is not possible to order the return of the ECI goodwill which passed to plaintiffs under the December 1 instruments. Thus, in spite of the loss of employer lists and information file under the district court order, plaintiffs will retain much of that business advantage gained solely by virtue of being the successor to the ECI operation. And since plaintiffs are not obligated to make further payments under the rescinded consulting contract, the retention of such business advantage constitutes a substantial windfall gain. A result more in keeping with the true substance of the transaction would be had by treating the December 1 documents as an indivisible whole. Under this theory, defendant’s failure to perform adequately under the consulting arrangement would constitute but a minor breach of the overall contract of sale. Under the rule that a nonmaterial breach of contract neither justifies rescission nor excuses counter-performance, defendant should be answerable in damages only for his breach. See, e. g., 5 Corbin, Contracts, § 1104; 12 Williston, Contracts (3 ed.) § 1467.

Accordingly, I would remand the matter with instructions to enter judgment for plaintiffs in the amount of $32,500, less any amount of damages defendant could establish were proximately caused by the improper advice and less the amount allowed for punitive damages.

1 . 4 Dunnell, Dig. (3 ed.) § 1831, and cases cited thereunder.

2 . Indeed, it would have been quite impossible for Thompson and the other employees to operate the business without first having procured the releases from ECI.

3 . That the parties did not place great emphasis on the consulting services to be provided under the agreement is indicated by the terms of the agreement itself. According to the contract, defendant was under no affirmative obligation to monitor or counsel with respect to plaintiffs’ daily operations. That is, defendant was required only to render advice upon plaintiffs’ “specific request.” In light of the $32,500 consideration paid by plaintiffs, such “consultation” constituted a truly minimal obligation for defendant.