Ellis v. Candia Trailers & Snow Equip., Inc.

• Decision Date: 21 December 2012
• Docket Number: No. 2011–613.,2011–613.
• Citation: 58 A.3d 1164,164 N.H. 457
• Parties: David ELLIS v. CANDIA TRAILERS AND SNOW EQUIPMENT, INC. and another.
• Court: New Hampshire Supreme Court

164 N.H. 457

58 A.3d 1164

David ELLIS

v.CANDIA TRAILERS AND SNOW EQUIPMENT, INC. and another.

No. 2011–613.

Supreme Court of New Hampshire.

Argued: Oct. 11, 2012.

Opinion Issued: Dec. 21, 2012.

Orr & Reno, P.A., of Concord (James F. Laboe and Robert S. Carey on the brief, and Mr. Laboe orally), for the petitioner.

Emile R. Bussiere, Jr., of Manchester, by brief and orally, for the respondents.

LYNN, J.

The petitioner, David Ellis,¹ appeals an order of the Superior Court (McNamara, J.) rescinding a non-compete agreement and ordering partial restitution as a remedy, and finding the New Hampshire Consumer Protection Act (CPA), RSA ch. 358–A (2009), inapplicable to the respondents' conduct. The respondents, Candia Trailers and Snow Equipment, Inc.² and its principals, Jeffrey Goff (Goff) and Suzanne Goff, cross-appeal the rescission of the non-compete agreement. We affirm in part, reverse in part, and remand.

The trial court found the following facts. Since the 1980s, the Goffs owned and Goff operated Precision Truck, a business which sold and installed truck bed parts, bed linings, and various accessories. In 2006, the Goffs sold Precision Truck to Ellis, memorializing the agreement in three documents: an Asset Purchase Agreement (APA), a Non–Compete Agreement (NCA), and an Inventory Purchase Agreement (IPA).

Ellis signed the APA on February 22, 2006, agreeing to pay $20,000 for Precision Truck's assets, including its good will, i.e., the business's name, telephone numbers, customer lists, working agreements, advertising materials, etc. The APA also contained a consulting agreement and tenancy agreement, which provided that Ellis would operate Precision Truck at its existing premises for ninety days after the closing, during which time Goff would work there as a full-time consultant. The APA specified that Ellis's obligations were conditioned on the Goffs executing the NCA and IPA.

On March 23, 2006, the Goffs executed the NCA, agreeing not to compete with Ellis in his operation of Precision Truck and, among other things, "not [to] solicit, divert or take away, the business or patronage of any of the customers of [Precision Truck] with whom [it] has had a relationship prior to the execution of the [APA]." The NCA provided that, under the terms of the APA, Ellis agreed to purchase the business assets of Precision Truck, including the company's good will, and that Ellis "would not acquire the business without Goffs' covenant not to compete." Each party acknowledged that the other "would suffer irreparable harm and would not have adequate remedy at law for the material breach of [the NCA], even though some damages may be provable." The parties agreed that equitable remedies, including injunctive relief, would be available in case of breach. Ellis paid $340,000 to the Goffs for executing the NCA.

Although the NCA was to remain in effect for seven years, it would expire much sooner—on June 1, 2007—if Ellis breached the third agreement, the IPA. The IPA obligated Ellis to buy Precision Truck's remaining inventory at cost by June 1, 2007, and "[i]f [Ellis] fails to fulfill this covenant, ... Jeffrey Goff shall be relieved of [his] obligations under the Non–Compete Agreement."

Within a few weeks of signing the NCA, and in violation of its terms, Goff began competing with Precision Truck. Ellis thereafter failed to purchase all of Precision Truck's inventory by June 1, 2007.

Ellis sued the respondents for breach of contract and violation of the CPA, asking the court, among other things, to rescind the NCA. Although he had initially included a claim for damages, Ellis ultimately opted to proceed to trial only on his claims seeking rescission and restitution for breach of the NCA and violation of the CPA.

The trial court found that the NCA, IPA, and APA were three separate agreements, each with its own terms, obligations, and remedies for breach. The court also found that Goff breached the NCA and that Ellis breached the IPA. Because Ellis failed to purchase Precision Truck's remaining inventory by June 1, 2007, the trial court ruled that the NCA remained in effect only until that date. Nevertheless, because the court found that Goff materially breached the NCA almost immediately after signing it and acted as though the NCA did not exist, it rescinded the NCA and awarded Ellis partial restitution.

Having found that the NCA was severable from the IPA and APA, the court calculated a restitution award for breach of the NCA by dividing its total value, $340,000, by its intended duration of seven years, or eighty-four months. Multiplying the monthly value by the number of months during which Goff owed Ellis an obligation not to compete, i.e., until June 2007, the court awarded Ellis the resulting amount, $60,714.28. The court rejected Ellis's CPA claim, finding the statute inapplicable because the sale of Precision Truck to Ellis was an isolated sale. This appeal and cross-appeal followed.

Both parties argue that the trial court unsustainably exercised its discretion when it rescinded the NCA and awarded partial restitution to Ellis. The respondents argue that: (1) the evidence presented to the court was insufficient to support a finding of material breach justifying rescission; and (2) rescinding the NCA alone was improper because the NCA was not severable from the IPA and APA. Ellis, on the other hand, argues that partial restitution did not go far enough to return him to the status quo because Goff was allowed to retain the bulk of the consideration he received for the agreement (the NCA) he breached. Ellis also argues that the trial court erred when it found the CPA inapplicable. Because we conclude that the trial court erred when it found the NCA, APA, and IPA to be severable, we reverse its order rescinding the NCA alone and ordering partial restitution.

"Rescission is an equitable remedy the granting of which is always a matter within the sound discretion of the trial court, depending upon the circumstances of each particular case." Mooney v. Nationwide Mut. Ins. Co., 149 N.H. 355, 357, 822 A.2d 567 (2003) (quotation omitted). Equitable rescission, with restitution, is a remedy that restores the injured party to the position occupied before the transaction, id., and "rests upon the relative equities of the parties as determined by the trial court." Derouin v. Granite State Realty, Inc., 123 N.H. 145, 147–48, 459 A.2d 231 (1983). If the status quo cannot be restored, a party cannot obtain rescission and must seek damages instead. 12A C.J.S. Cancellation of Instruments; Rescission § 80, at 558 (2004).

If a contract is part of a larger agreement, it may be rescinded only if it is severable from that larger agreement; if it is not, the entire agreement must be rescinded.

The general rule undoubtedly is that a right to rescind applies to the whole of the contract and cannot be exercised as to a part only.

....

Usually where partial rescission is allowed it is founded on the proposition that the contract is severable and for rescission purposes is to be regarded as embracing two or more contracts.

Annotation, Partial Rescission of Contract, 148 A.L.R. 417, 418, 423 (1944) ; cf. Pearson v. Baldwin, 81 N.H. 247, 249, 123 A. 891 (1924) ("[A]n entire, indivisible contract ... must ... stand or fall in its entirety.").

The trial court found the APA, IPA, and NCA to be severable and rescinded the NCA alone. "[Severability] requires that the parties' promises and considerations be capable of apportionment, so that each promise and its corresponding consideration is analogous to a separate contract." Technical Aid Corp. v. Allen, 134 N.H. 1, 18, 591 A.2d 262 (1991).

[Whether a contract is severable or indivisible] depends upon the intention of the parties as shown by the terms and formal character of the documents which they used to express their intention, when read in the light of the circumstances under which the documents were made. In other words, the court is called upon to interpret the documents. This is a question of law, the decision of which is reviewable in this court.

Kidd v. Traction Co., 74 N.H. 160, 170, 66 A. 127 (1907) (citation omitted). We review questions of law de novo. In the Matter of Taber–McCarthy & McCarthy, 160 N.H. 112, 115, 993 A.2d 240 (2010).

We conclude that the NCA is not severable from the IPA and APA because, by their terms, the agreements are interdependent.

As an aid to ascertaining the intention of the parties [to treat the contract as severable], it is proper to consider whether the contract is to be performed only as a whole and whether each and all of its parts are interdependent and common to one another and to the consideration, or whether it is susceptible of division and apportionment.

77A C.J.S. Sales § 157, at 224 (2008) ; cf. Allen, 134 N.H. at 18, 591 A.2d 262. Although the parties structured the sale of Precision Truck as three separate agreements, the APA made Ellis's obligations under it contingent upon the Goffs executing the NCA and Ellis executing the IPA. The NCA referenced the APA and stated that Ellis would not buy Precision Truck's assets unless the Goffs signed the NCA. In addition, the duration of the NCA was contingent upon Ellis's performance under the IPA: if he failed to purchase Precision Truck's inventory by a fixed date, Goff's obligations under the NCA would terminate seven years earlier than if Ellis completed the inventory purchase. Because, in one way or another, each agreement was contingent on the other two, they "resulted from a single assent to the whole matter" and "were part of one single undertaking." Maloney v. Boston Development Corp., 98 N.H. 78, 83, 95 A.2d 129 (1953).

The trial court correctly noted that each agreement is, on its face, supported by separate consideration. This, however, is not dispositive of whether the agreements are severable.

Where the agreements of parties relate to the whole of the consideration on both sides, the promises are dependent, and

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