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Graziano v. Grant

326 N.J. Super. 328, 741 A.2d 156 (App. Div. 1999)

NON-COMPETITION—A court of equity can imply non-competition restrictions into a contract even where no such provision exists, and has the power to craft the terms of such a restriction.

After working as a part-time employee of a medical corporation, a doctor was invited to buy into the corporation as a shareholder. The older of the two original shareholders thought himself to be in poor health and expected that he might not survive three years. With the help of the corporation’s accountant, a document which began with the phrase “Preliminary proposed conditions” was prepared. It was somewhat complex and contained some undefined references to the effect that “[t]he continued duties and services expected of [the older doctor] for the three year period should be discussed.” The document contemplated that the older doctor would retire at the end of the three year period. Although the parties did not follow the compensation and payment outline within the document, the financial results and payments effectively matched its plan. When the two younger doctors took the position that the older doctor should stop practicing with them at the end of the three year period, the older doctor refused and the younger doctors applied to the courts to force his retirement. The lower court ordered the older doctor to retire and imposed a somewhat broad three year restrictive covenant on him. It also awarded attorney’s fees to the two younger doctors and granted other relief. On appeal, the older doctor argued that the document captioned as a “proposal” was not sufficiently definite and certain “as to have been the basis of the order for summary judgment requiring specific performance.” The Appellate Division acknowledged that “the terms of the contract must be definite and certain so that a court may order with precision what the parties must do,” but just because a document, when read literally, may make it seem indefinite “does not necessarily require a conclusion that it may not be specifically enforced.” After examining the situation of the parties under the surrounding circumstances, the Court rejected the older doctor’s contention that no enforceable contract existed because the negotiations were preliminary and because the terms contained in the proposal were inconsistent with each other and with the parties’ performance. While agreeing that the proposal could have been clearer, the Court concluded that the parties chose to perform the essential terms of the “proposal,” thereby making it an agreement that the older doctor would sell his interest in the corporation to the entering doctor and retire on a given date. “If the parties agree on the central terms and then further manifest an intention to be bound by those terms, they have created an enforceable contract.” The fact that the document was labeled “Preliminary proposed conditions” was not dispositive. Acceptance of the proposal “may come either from words, creating an express contract, or from conduct, creating a contract implied-in-fact.” Despite the Statute of Frauds, the agreement was held to be enforceable because there had been performance by one party and to hold the agreement to be unenforceable would work an inequity on the party who has performed.

The Appellate Division, however, was troubled that the lower court enjoined the older doctor “from treating former patients of the practice for a period of three years, and further enjoin[ed] him from practicing medicine for a period of three years within twenty miles of the practice’s office.” The older doctor contended that the lower court could not place restrictions upon his right to practice medicine because the agreement did not expressly provide for a covenant against competition. The Appellate Division recognized “that it is not the function of the court to make a better contract for the parties, or supply terms that had not been agreed upon.” However, “a court of equity should not permit a rigid principle of law to smother the factual realities to which it is sought to be applied.” The Appellate Division found that the lower court “correctly concluded that since the agreement contemplated [the older doctor’s] retirement, the parties did not formally agree to a restrictive covenant.” “[T]he essence of the shares of stock in a medical practice is the patient base.” Therefore, since a court lacks the authority to require a doctor to retire against his will, it was reasonable for the lower court to hold that “it would be unfair and inequitable to permit [the older doctor] to retain the benefits of the bargain without being subject to some reasonable limitation upon his right to retract his agreement and compete with [the remaining doctors].” The imposition of a reasonable covenant against competition was held to be consistent with the broad equitable powers entrusted to a judge. Having said that, the Court then held that the quality of the record below and the lack of findings of fact or conclusions of law hindered its ability to determine whether the lower court properly exercised its broad discretion to fashion a restrictive covenant remedy. It was particularly concerned about the twenty-mile limitation and the three-year period. Consequently, it remanded the matter to the lower court for a more thorough analysis of the proper scope of the restrictive covenant to be imposed on the older doctor under the circumstances.


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