Summary
In Tode v. Gross, 127 N.Y. 480, the contract, referring to violations, provided: * * * Under a "penalty of five thousand dollars, which sum is hereby named as stipulated damages, to be paid by the party of the first part (defendant), or his heirs, executors, administrators or assigns, in case of a violation by the party of the first part (defendant) of this covenant, of this contract, or any part thereof, within five years from the date hereof."
Summary of this case from Pastor v. SolomonOpinion
Argued June 12, 1891
Decided October 6, 1891
John Fennell for appellant. Henry Bacon for respondents.
The business carried on by the defendant was founded on a secret process known only to herself and her agents. She had the right to continue the business, and, by keeping her secret, to enjoy its benefits to any practicable extent. She also had the right to sell the business, including as an essential part thereof the secret process, and, in order to place the purchasers in the same position that she occupied, to promise to divulge the secret to them alone and to keep it from everyone else. In no other way could she sell what she had and get what it was worth. Having the right to make this promise, she also had the right to make it good to her vendees and to protect them by covenants with proper safeguards against the consequences of any violation. Such a contract simply left matters substantially as they were before the sale, except that the seller of the secret had agreed that she would not destroy its value after she had received full value for it. The covenant was not in general restraint of trade, but was a reasonable measure of mutual protection to the parties, as it enabled the one to sell at the highest price and the other to get what they paid for. It imposed no restriction upon either that was not beneficial to the other by enhancing the price to the seller or protecting the purchaser. Recent cases make it very clear that such an agreement is not opposed to public policy, even if the restriction was unlimited as to both time and territory. ( Diamond Match Co. v. Roeber, 106 N.Y. 473; Hodge v. Sloan, 107 id. 244; Leslie v. Lorillard, 110 id. 519, 534; Watertown Thermometer Co. v. Pool, 51 Hun, 157.) The restriction under consideration, however, was not unlimited as to time.
The chief reliance of the defendant in this court, where the point seems to have been raised for the first time, is that the covenant, so far as stipulated damages are concerned, is confined to the personal acts of Mrs. Gross, and does not embrace the acts of her agents. A careful reading of the agreement, however, in the light of the circumstances surrounding the parties when it was made, shows that no such result was intended. What was the object of the covenant? It was to keep secret at all hazards the process upon which the success of the business depended. On no other basis could the plaintiffs safely buy or the defendant sell for what her property was worth. Who had the power to keep the process secret? Clearly the defendant, if anyone, as she had confided it to no one except her trusted agents, who were nearly related to her by blood or marriage. But could she covenant against the acts of those over whom she had no control? She had the right to so covenant by assuming the risk of their actions, and unless she had done so, presumptively, she could not have sold her factory for so large a sum. It was safer for her to sell with such a covenant than it was for the plaintiffs to buy without it. She could exercise some power over her own husband and her father and her husband's brother, all of whom had been associated with her in carrying on the business, and whose actions in certain other respects she assumed to control for a limited time, whereas the plaintiffs were powerless unless they had her promise to keep the process secret at the peril of paying heavily if she did not. It is not surprising, therefore, to find that the restrictive part of the covenant applies with the same force to her agents that it does to herself, for she undertakes that neither she nor they will disclose the secret or engage in making or selling either kind of cheese, or use the trade-marks or names connected with the business. We do not think that a personal act of the defendant is essential to a violation of this covenant by her, for if she permits, or even does not prevent her agents from doing the prohibited acts, the promise is broken. While it is her exclusive covenant, it relates to the action of others, and if they do what she agreed that they would not do, it is a breach by her, although not her own act. She violated her agreement, not by selling herself, but by not preventing others from selling. This construction of the restrictive part of the covenant would hardly be open to question were it not that in the same sentence occurs the reparative or compensatory part designed to make the plaintiffs whole, if the defendant either could not or did not keep her agreement. While this provides that any violation involves the penalty of $5,000, it adds, "which sum is hereby named as stipulated damages to be paid" by the defendant in case of a violation by her of the covenant in question. What kind of violation is thus referred to? The defendant says a personal violation by her only, but we think, for the reasons already given, that the spirit of the agreement includes both a violation by her own act, and by the act of those whom she did not prevent from selling, although she had agreed that they would not sell. As no one not a party to a contract can violate it, every act of defendant's former agents contrary to her covenant was a violation thereof by her, whether she knew of it or assented to it or not. Whenever that was done which she agreed should not be done, it was a breach of a covenant by her, even if the act was contrary to her wishes and in spite of her efforts to prevent it. Her covenant was against a certain act by any one of four persons, including herself. Two of those persons separately did the act which she had agreed that neither of them should do, and thus there was a violation of the covenant by her the same as if she had done the act in person.
The argument of the learned counsel for the defendant that the contract fixed a sum to be paid in case of a violation by the defendant, but not in case of a violation "by the other parties," while plausible, is unsound, for there were no "other parties" who could break the covenant. She was the sole covenantor, and unless she kept the covenant she broke it, and she did not keep it.
As the actual damages for a breach of the covenant would necessarily be "wholly uncertain and incapable of being ascertained, except by conjecture," we think that the parties intended to liquidate them when they provided that the sum named should be "as stipulated damages." The use of the word penalty under the circumstances is not controlling. ( Bagley v. Peddie, 16 N.Y. 469; Dakin v. Williams, 17 Wend. 448; affirming 22 id. 201; Wooster v. Kisch, 26 Hun, 61.)
As there is no other question that requires discussion, the judgment should be affirmed, with costs.
All concur, except BROWN, J., not sitting.
Judgment affirmed.