On December 21, 2012, the Supreme Court of New Hampshire, in Ellis v. Candia Trailers & Snow Equipment, Inc., found that a non-compete agreement was a fundamental component of a purchase and sale transaction which was memorialized in three separate agreements. The Seller began competing with Buyer shortly after the sale. After the Buyer did not follow through on purchasing all required assets of the Seller, the Supreme Court reversed the trial court’s decision to partially rescind the non-compete agreement, and instead decided that the non-compete was so essential to the transaction that it required complete rescission of the transaction.

While non-compete agreements frequently come up in contexts other than employment agreements, such as the sale of a business, this case is interesting because of the unusual structure of the deal. (For another example of a non-compete arising outside of an employment agreement, see Caesar v. Sindelin (decided May 4, 2012, Massachusetts Lawyers Weekly No. 11-070-12), where a Massachusetts Appeals Court held that a Probate and Family Court Judge had the authority to enjoin a party to a divorce proceeding from operating a competing business.)

In 2006, the Goff family, owners of Precision Truck (collectively referred to as “the Sellers”), sold its business to Candia Trailers and Snow Equipment, Inc., owned by David Ellis (“the Buyer”). The deal was memorialized by three agreements: an Asset Purchase Agreement (“APA”), a Non-Compete Agreement (“NCA”) and an Inventory Purchase Agreement (“IPA”). The APA specified that it was conditioned on the Sellers signing the NCA and the IPA. The Buyer paid $340,000 to the Sellers as consideration for signing the NCA, which represented the bulk of the purchase price. The Buyer signed the APA and paid $20,000 for the assets, which included the good will of Precision Truck. While the NCA had a term of seven years, it would expire much earlier if the Buyer did not purchase the rest of the assets of Precision Truck by June 1, 2007, which was required under the terms of the third agreement, the IPA. If the Buyer breached that agreement, the Sellers would be relieved of the obligation of the NCA.

Shortly after execution of these agreements, the Sellers started to compete with Precision Truck in violation of the NCA. Thereafter, the Buyer failed to purchase all of the assets of Precision Parts by the date specified in the IPA.

The Buyer brought suit to rescind the NCA for breach of contract and the Sellers counter-sued the Buyer for breach of contract for not buying all of the assets of Precision Parts.

Now comes the interesting part. The trial court found that the APA, the NCA and the IPA were each separate agreements making the NCA severable. While the Court found that the Sellers “materially breached” the NCA, it also found that the Buyer breached the IPA by not buying all the assets by the date certain specified in that agreement. As a result, it ruled that the NCA would be rescinded starting on that date, thereby granting only partial rescission and partial restitution to the Sellers.

On appeal, the Supreme Court of New Hampshire reversed the trial court’s decision and held that “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 Court found that the three agreements, by their terms, were interdependent and were therefore not severable. It therefore found that since the sale was contingent on the NCA, it could not be rescinded without rescinding the other two agreements. The Supreme Court sent the case back to the trial court to determine what remedies were appropriate.

In drafting the three agreements, the parties complicated what would otherwise have been a straightforward purchase and sale transaction. It was only the language of the three agreements which made the entire transaction contingent on the NCA that resulted in the rescission of all the agreements. While drafting was determinative here, this case demonstrates how critical a non-compete agreement can be to the entire transaction.