Webb, E. R.

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Kentucky Law JournalVolume 29 | Issue 2 Article 121941Contracts not to Compete Within a Certain AreaWithout a Provision for an Express Sale of GoodWillE. R. WebbUniversity of KentuckyFollow this and additional works at: https://uknowledge.uky.edu/kljPart of the Contracts CommonsRight click to open a feedback form in a new tab to let us know how this document benefitsyou.This Comment is brought to you for free and open access by the Law Journals at UKnowledge. It has been accepted for inclusion in Kentucky LawJournal by an authorized editor of UKnowledge. For more information, please contact UKnowledge@lsv.uky.edu.Recommended CitationWebb, E. R. (1941) "Contracts not to Compete Within a Certain Area Without a Provision for an Express Sale of Good Will," KentuckyLaw Journal: Vol. 29 : Iss. 2 , Article 12.Available at: https://uknowledge.uky.edu/klj/vol29/iss2/12CASE COMMENTScourt did not infer a condition subsequent, and their finding is in har-mony with the usual rules of construction for conditions subsequent.CLARENCE CORNELIUS.CONTRACTS NOT TO COMPETE WITHIN A CERTAIN AREAWITHOUT A PROVISION FOR AN EXPRESS SALEOF GOOD WILLAs a part of the contract by which he sold his hospital in FloydCounty to the plaintiffs, the defendant agreed not to own or operate ahospital in that county for ten years. Under the same agreement heassigned to the plaintiffs hospitalization contracts with the county anda labor union, together with his good will. Within two years he erectedanother hospital in Knott County, three hundred yards from the FloydCounty line. Many of the defendant's former patients, residing inFloyd County, began to patronize his new hospital instead of that ofthe plaintiffs. The latter sought to enjoin the defendant from receivingthese former patients on the ground that he was breaching his contractnot to compete with the plaintiffs in Floyd County. The lower courtenjoined the defendant from receiving the patients covered by theassigned contracts, but refused to enjoin him from receiving any otherpatients. This decision was reversed upon appeal and the defendantwas enjoined from receiving at his hospital, for the remainder of theten year period, any patients from Floyd County.'By the contract there was an express sale of good will as to theassigned contracts, but mention was not made of a sale of the good willof the hospital. Nevertheless, the sale of a business includes an impliedtransfer of good will, though there is no stipulation to that effect in thecontract.2 The only effect of this implied sale of good will is to raisean obligation on the part of the seller not to derogate from his grant bydirectly interfering with the business which he has sold to thepurchaser.3However, this obligation does not extend so far as to preclude thetransferor from opening up a new business in competition with that ofthe purchaser. While he could not directly interfere with the businessthat he has sold to the purchaser by soliciting his old customers, hecould Indirectly interfere with it by dealing with them when they cameto him of their own accord.' That was what the defendant did here.Since it was not alleged that the defendant solicited any of his formercustomers or did anything else that would amount to a direct inter-'Johnson et al. v. Stumb et al., 277 Ky. 301, 126 S. W. (2d) 165(1938).2 Johnson v. Bruzek, 142 Minn. 454, 172 N. W. 700 (1909). SeeMadox v. Fuller, 173 So. 12, 14 (Ala. 1937); 5 Williston onContracts (Rev. Ed. 1937), sec. 1640.'5 Williston, Contracts (Rev. Ed. 1937), sec. 1640.4 Ibid.KENTUCKY LAW JOURNALference with the business that he has sold, the principles covering animplied sale of good will are opposed to the decree of the upper court.The defendant agreed not to own or operate a hospital in FloydCounty. This provision was Inserted in the contract to enable theplaintiffs to operate a hospital without the competition of a hospitalconducted by the defendant in Floyd County. The effect of this con-tract not to compete is to supplement the protection given the pur-chaser by the implied sale of good will.Contracts not to compete are strictly construed.* The reason forsuch strict construction is to prevent the extension of contracts, thenatural effect of which is to restrain trade and personal liberty, beyondtheir fair import.7 The effect of the decree of the appellate court wasto give an extremely liberal construction to the contract. By the termsof that contract the defendant agreed not to own or operate a hospitalIn Floyd County.8 He did not agree that he would not own or operatea hospital in any county other than Floyd County. He did not say inthe contract that if he did operate a hospital in another county, hewould refuse to accept patients from Floyd County. If the plaintiffshad desired to protect their practice from the competition of the defend-ant wherever his hospital was located, they might have Inserted a pro-vision to that effect in the contract. The liability of construction giventhe contract in the instant case has little support.9 Moreover, the effect5 See Johnson et al. v. Stumbo et al., 277 Ky. 301, 126 S. W. (2d)165, 168 (1938).*Haldeman v. Simonton, 55 Iowa 144, 7 N. W. 483 (1880); Stateex rel. Youngmai v. Calhoun, 231 S. W. 647 (Mo. App. 1921); McCartyv. Constable, 221 App. Div. 307, 223 N. Y. Supp. 484 (1927) (The promi-sor made an unsolicited sale to a resident of the forbidden area at hisstore); Thomas v. Miles, 3 Ohio St. 274 (1854) (The promisor wasallowed to supply customers in Ohio from his business in New Ybrk,when he had agreed not to conduct this business in Ohio); Raub v.Van Horn, 133 Pa. 573, 19 Atl. 704 (1890) (Under the promisor's agree-ment not to resume his practice at a certain town, he was allowed toreceive patients from there at another town, six miles away); MidlandLumber & Coal Co. v. Roesler, 203 Wis. 129, 233 N. W. 614 (1930) (Asale to a resident of the prohibited area at the promisor's lumber yardand a delivery of the goods inside that area for the customer's accom-modation was held not to be doing business in that area in violation ofthe contract).See Haldeman v. Simonton, 55 Iowa 144, 7 N. W. 493, 494 (1880).sSee Johnson et al. v. Stumbo et al., 277 Ky. 301, 126 S. W. (2d)165, 168 (1938).9 See Skaggs v. Simpson, 33 Ky. Law Rep. 410, 110 S. W. 251 (1908).This case may possibly be distinguished on the ground that the promi-sor started his business anew just outside the limits of the city wherehe had agreed not to practice. This is such a minor distinction, hcw-ever, that it is doubtful that it would prevent the Skaggs case frombeing in point and supporting the decision in the Stumbo case. Theother cases which are cited in support of it are not in point. Elkins v.Barclay, 243 Ky. 144, 47 S. W. (2d) 945 (1932) is not in point, for inthat case the promisor entered the territory in which he had agreed notto compete and there performed burial services. This violated theexpress terms of the contract by which the promisor agreed not toCASE COMMENTSof the decree is to unduly restrict the people of Floyd County in theirfree choice of hospitalization.1 0E. R. WEBBCONTRACTS-IS A NEW AMORTIZATION PLAN FOR PAY-MENT OF A MORTGAGE CONTRACT A NOVATIONIN KENTUCKY?A stockholder in an insolvent national farm loan association soughtpayment of the face value of his stock. A mortgage contract betweenthe stockholder and the association had been made in 1926 as a colidi-tion precedent to a loan granted by the Federal Land Bank of Louis-ville.' Subsequent to amendment of the Farm Loan Act in 1933 a newagreement had been made which stipulated that the unpaid amount ofindebtedness should be repaid on an amortization plan. Plaintiff con-tended, inter alia, that by reason of the "new contract" his liability asa stockholder should be determined by the provisions of the amend-ment. The court denied recovery, holding that the amendment reliedon applied only to contracts, debts or engagements of the associationentered into after 1933. The court further stated that the new agree-compete with the promissee in that county. Kochenrath v. Christman,180 Ky. 799, 203 S. W. 738 (1918) is not in point, for there the promisorset up a business in the forbidden territory and could not have violatedthe provisions of the contract more flagrantly. Gutzeit v. Strader, 158Ky. 131, 164 S. W. 318 (1918) is not in point, for in that case the promi-sor had operated a business in the forbidden territory by means of adummy corporation. This amounted to a violation of the express termsof the contract. Foxworth-Galbraith Lumber Co. v. Turner, 121 Tex.177, 46 S. W. (2d) 663 (1932) is distinguishable. There the promisordid considerable solicitation in the territory in which he had agreednot to compete, which might amount to doing business there accordingto the dictum of Midland Lumber Co. v. Roessler, 203 Wis. 129, 233N. W. 614, 616 (1930).(1939) 38 Mich. Law Rev. 242, 244.One desiring to borrow money from a Federal Land Bank mustbecome a shareholder in the Farm Loan Association; as such a share-holder, prior to 1933, he was individually responsible, not only for theamount represented by his shares, but in addition thereto to the extentof the amount of stock owned by him at its par value. See Byrne v.Federal Land Bank of St. Paul, 61 N. D. 265, 237 N. W. 797 (1931).However, in 1933 the Farm Loan Act was amended to read: ". . . theshareholders of national farm loan associations shall not be held indi-vidually responsible for any contract, debt, or engagement of suchassociation entered into after June 16, 1933". (Italics added.)12 U. S. C. A. sec. 744a. Thus if, and only if, the new agreement dis-charged and took the place of the existing loan contract it was a "con-tract, debt, or engagement of such association entered into afterJune 16, 1933". The purpose of the amendment is not entirely clear.If it contemplated a different degree of liability for all who becamestockholders after 1933, then the court's concern as to a novation, ornew contract, was unnecessary. If it is to be construed literally toapply to contracts made after 1933, it must be decided whether the newagreement novated the old.K. L. J.-8

Contracts not to Compete Within a Certain Area Without a Provision for an Express Sale of Good Will

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Contracts not to Compete Within a Certain Area Without a Provision for an Express Sale of Good Will

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