Gambar Enterprises, Inc. v. Kelly Services, Inc.

• Decision Date: 13 July 1979
• Citation: 69 A.D.2d 297,418 N.Y.S.2d 818
• Parties: GAMBAR ENTERPRISES, INC. and James J. Wood, Jr., Respondents, v. KELLY SERVICES, INC., Appellant.
• Court: New York Supreme Court — Appellate Division

Page 818

418 N.Y.S.2d 818

69 A.D.2d 297

GAMBAR ENTERPRISES, INC. and James J. Wood, Jr., Respondents, v. KELLY SERVICES, INC., Appellant.

Supreme Court, Appellate Division, Fourth Department.

Argued May 16, 1979.

Decided July 13, 1979.

Harris, Beach, Wilcox, Rubin & Levey, Rochester, for appellant, John W. Clarke, Rochester, of counsel.

Nixon, Hargrave, Devans & Doyle, Rochester, for respondents, Frank H. Penski, Rochester, of counsel.

Before DILLON, P. J., and SIMONS, HANCOCK, DOERR and MOULE, JJ.

MOULE, Justice.

On March 8, 1971 plaintiff James Wood executed a form agreement prepared by defendant Kelly Services, Inc. (Kelly) entitled "branch manager contract" in which he was designated as an independent contractor acting as Kelly's agent in furnishing temporary business services in Monroe County. Formerly, Wood was employed by Kelly at its corporate headquarters in Michigan. Under the branch manager contract, Wood principally agreed to devote such time and employ such resources as were necessary to achieve and maintain "satisfactory sales performance" as evaluated by Kelly based upon potential sales and sales in comparable territories, to provide suitable office facilities and employ sales and office personnel and to interview prospective temporary service employees and hire them on Kelly's payroll. Among Kelly's duties under the contract were: providing essential instructions, manuals and materials for the conduct of the temporary services business, administering the payroll accounts of the temporary service employees and bonding and insuring these employees, handling the accounts receivable, and nationally advertising the business. As commissions, Kelly agreed to pay Wood 45 percent of the monthly gross margin under $8,000 accrued on Kelly's books for services performed by the temporary service employees covered by the agreement and 40 percent of the monthly gross margin over $8,000.

The term of the branch manager contract was expressly set forth in the agreement: the agreement was to terminate upon the death or incompetency of Wood or upon Wood's reaching age 65, in which event Kelly could continue the agreement from year to year. The agreement also provided for termination: at Kelly's option "for cause", in the event Wood violated a provision of the agreement, entered bankruptcy, was convicted of a felony, allowed his reputation to become impaired through publicity or notoriety, competed with Kelly within 50 miles of a city in which Kelly was operating, or disclosed Kelly's trade secrets to others; at Kelly's option "due to circumstances beyond control", in the event that continuance of the business contemplated by the agreement in a normal profitable manner was impaired because of labor union activity, legislative enactment, regulation or interpretation thereof, military action, Act of God, war or civil disorder, or any similar circumstance; and, by either party, as follows:

"8. Termination by the Parties. This agreement may be terminated by either the Manager or by Kelly as follows:

(a) The Manager may terminate by giving notice to Kelly, in which event this agreement shall terminate at the end of eight (8) accounting weeks. If the Manager shall give notice of termination under this sub paragraph, Kelly shall have the option to terminate this agreement at any time prior to the expiration of the eight (8) week period, but in such event the Manager shall continue to be paid the net commissions from the business in the Territory until the date upon which this agreement would otherwise have terminated because of the notice given by the Manager. * * *

(b) Should Kelly wish to terminate this agreement For any reason (emphasis added) other than as set forth in sub-paragraph (a) above, paragraph 7 (term of agreement), paragraph 9 (termination for cause), paragraph 10 (termination due to circumstances beyond control), paragraph 19 (termination upon determination that agreement is invalid), Kelly may do so, and such termination shall be immediately effective, but Kelly shall thereupon become obligated to pay to the Manager, in addition to the commissions earned in the Territory to date of termination, a sum of money equal to the net commissions earned in the Territory in the Accounting Month or Months preceding the Accounting Month in which Kelly's notice of termination is given in accordance with the following schedule:

Wood has performed as Kelly's branch manager since the execution of the agreement in 1971. In 1975 Kelly agreed to expand Wood's territory under the branch manager contract to include Ontario County. Wood's annual commissions under his agreement with Kelly increased from $59,488 in 1972 (his first full year) to $151,635 in 1978. In August 1977 Wood assigned his rights under the branch manager contract to plaintiff Gambar Enterprises, Inc., a corporation which he solely owns. On February 26, 1979 Kelly wrote a letter to Wood in which it revoked its acceptance to the assignment of the branch manager contract and elected to terminate the agreement effective March 2, 1979 under the provisions of paragraph 8(b). No reason was offered for the termination; however, Kelly claims that it was dissatisfied with Wood's performance. Kelly did not claim at the time it sought to terminate the branch manager contract that Wood failed to achieve and maintain "satisfactory sales performance" such that it could terminate the agreement "for cause".

Plaintiffs commenced this action on February 28, 1979 by service of a summons and a complaint alleging six causes of action: first, plaintiffs sought a permanent injunction preventing Kelly from revoking its consent to the assignment of the branch manager contract and from terminating the contract without a good reason, alleging, among other things, that the contract is one of adhesion and that the termination was made in bad faith; second, plaintiffs sought a declaration that the contract is void because paragraph 8(b) is unconscionable; third, plaintiffs sought a declaration that the contract is void because paragraph 8(b) constitutes a liquidated damages provision bearing no reasonable relation to the effect of termination of the contract; fourth, plaintiffs sought to reform paragraph 8(b) of the contract to reflect the intention of the parties that Kelly should be required to establish good cause for any termination; fifth, plaintiffs sought $1,000,000 in damages for Kelly's breach of the contract through its termination of the agreement; and, sixth, plaintiffs sought the alleged fair value of their Kelly "franchise", assertedly $1,000,000, in the event the contract was properly terminated but the liquidated damage provision of paragraph 8(b) is unenforceable.

Plaintiffs moved for a preliminary injunction under CPLR 6301 and obtained an order to show cause temporarily restraining Kelly from revoking its consent to the assignment of the branch manager contract and from terminating the contract, along with incidental relief, pending a hearing on the application for a preliminary injunction. Kelly cross-moved for dismissal of the complaint for failure to state a cause of action (CPLR 3211(a)(7)). Special Term granted plaintiffs' application for a preliminary injunction upon the condition that they file an undertaking in the amount of $2,500, denied Kelly's motion to dismiss the complaint, and granted a trial preference.

Kelly contends that the branch manager contract should be construed in accordance with Michigan law and that plaintiffs have failed to state a cause of action under Michigan law. Alternatively, Kelly contends that plaintiffs have failed to state a cause of action under New York law. Plaintiffs, on the other hand, assert that New York law should govern the construction of the branch manager contract and that they have stated a cause of action under the law of either New York or Michigan.

Paragraph 18 of the branch manager contract provided, among other things, that "* * * this agreement shall be construed in accordance with the laws of the State of Michigan except with respect to (a restrictive covenant not to compete) which shall be construed in accordance with the laws of the State in which (Wood's) primary business address is located." Traditionally, where the parties have manifested their intentions to have an agreement governed by the law of a particular jurisdiction, their intentions have been honored (Freedman v. Chemical Constr. Corp., 43 N.Y.2d 260, 265, n.1, 401 N.Y.S.2d 176, 179, 372 N.E.2d 12, 15; Companie de Inversiones Internacionales v. Industrial Mortgage Bank, 269 N.Y. 22, 26, 198 N.E. 617, 618; Dougherty v. Equitable Life Assur. Society, 266 N.Y. 71, 80, 193 N.E. 897, 899; cf. Haag v. Barnes, 9 N.Y.2d 554, 216 N.Y.S.2d 65, 175 N.E.2d 441). In this respect, the general rules concerning the law governing a contract are subordinate to the primary canon of construction requiring that the intention of the parties be given effect (8 N.Y.Jur., Conflict of Laws, § 20). The jurisdiction whose law the parties intended to apply, however, must bear a reasonable relation to the agreement (A. S. Rampell, Inc. v. Hyster Co., 3 N.Y.2d 369, 381, 165 N.Y.S. 475, 144 N.E.2d 371); and the enforcement of the provision applying a foreign rule of law must not violate a fundamental public policy of New York (see 8 N.Y.Jur., Conflict of Laws, § 24).

The record shows that the State of Michigan has sufficient contacts with the branch manager contract between Kelly and Wood to warrant an application of Michigan law. The contract, by its own terms, did not become effective until it was accepted by Kelly at its home office in Michigan. Further, several of the duties to be performed by Kelly under the contract were performed at its home office in Michigan. Kelly's temporary employees in Monroe and Ontario Counties, although interviewed and assigned to customers by Wood, mail their time cards to Kelly's home office where Kelly performs its...