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Ross v. Food Specialties, Inc.

6 N.Y.2d 336 Court N.Y. Decision date 1959-07-08 English

Decision Majority — Dye, J. · Dissent — Fboessel, J. (dissenting).

Contents

Majority

p. 336
Harold Ross et al., Appellants, v. Food Specialties, Inc., et al., Defendants, and John Godston et al., Respondents.
Argued February 23, 1959;
decided July 8, 1959.
p. 337
Murray T. Koven for appellants.
I. Mutual mistake is an issue of fact which, when properly proven, warrants reformation. The latter remedy merely corrects the contract by inserting that which the parties had intended but had omitted by such mistake. (Curtis v. Albee, 167 N. Y. 360 ; Greene v. Dickinson, 119 Ala. 346 ; Hearne v. Marine Ins. Co., 20 Wall. [87 U. S.] 488; Barry v. Lewis, 259 App. Div. 496 ; Seidman v. New York Life Ins. Co., 162 Misc. 560 , 253 App. Div. 804 ; Baird v. Erie R. R. Co., 210 N. Y. 225 .) II. Concededly, the right to reformation must be proven by clear, positive and convincing evidence. Ross readily met this burden by the proof he offered and which the court of first instance believed. (Amend v. Hurley, 293 N. Y. 587 ; Southard v. Curley, 134 N. Y. 148 ; United States v. Munroe, 5 Mason 572; Sawyer v. Hovey, 3 Allen 331 ; Simmons Creek Coal Co. v. Doran, 142 U. S. 417 .) III. A conflict in evidence is no bar to recovery in an action for reformation. Without such conflict there would indeed be no litigation. To bar reformation, the conflicting evidence offered must be believed. (Devereux v. Sun Fire Off., 51 Hun 147 ; Jenkins v. Lefaiver, 55 Hun 612 ; Ward v. Hewitt, 196 Misc. 624 ; Amend v. Hurley, 293 N. Y. 587 ; Voci v. Page, 123 Misc. 766 .) IY. The trier of the facts, who heard the evidence and observed the demeanor of the witnesses, was in the most advantageous position to decide which version of the facts was true. His finding, based on substantial evidence, should not be disturbed. (Danker v. Prudential Ins. Co., 243 App. Div. 527 ; Boyd v. Boyd, 252 N. Y. 422 ; People ex rel. Herzog v. Morgan, 287 N. Y. 317 ; Matter of Rich, 151 Misc. 852 ; Brunstein v. Brunstein, 273 App. Div. 847 .) Y. Upon the finding of reformation, Grodston and Westbury were properly enjoined from violation of the restrictive covenant as reformed. (Blatt macher v. Brown, 163 Misc. 389 ; Richmond Hill Realty Co. v. East Richmond Hill Land Co., 246 App. Div. 301 ; Hornstein v. Podwitz, 254 N. Y. 443 ; Elk St. Market Corp. v. Rothenberg, 233
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App. Div. 243 ; Advance Music Corp. v. American Tobacco Co., 296 N. Y. 79 ; Opera on Tour v. Weber, 285 N. Y. 348 .) VI. The award of damages against Godston was fully consonant with applicable rules of law. (Wakeman v. Wheeler & Wilson Mfg. Co., 101 N. Y. 205 ; Brady v. Erlanger, 188 App. Div. 728 , 231 N. Y. 563 ; Dunkel v. McDonald, 272 App. Div. 267 , 298 N. Y. 586 ; Bagley v. Smith, 10 N. Y. 489 ; MacGregor v. Watts, 254 App. Div. 904 ; Duane Jones Co. v. Burke, 306 N. Y. 172 ; Present v. Glazer, 225 App, Div. 23 ; Manuszewski v. Keele, 257 App. Div. 1036 ; Bates v. Holbrook, 89 App. Div. 548 .)
William A. Smith for John Godston, respondent.
I. Plaintiffs failed, as matter of law, to sustain the burden of the high degree of proof required in an action for reformation based on a claim of mutual mistake. (Salomon v. North British & Mercantile Ins. Co. of N. Y., 215 N. Y. 214 ; Amend v. Hurley, 293 N. Y. 587 ; Albany City Sav. Inst. v. Burdick, 87 N. Y. 40 ; Ward v. Hewitt, 196 Misc. 624 ; Strong v. Reeves, 280 App. Div. 301 , 306 N. Y. 666 .) II. Failure to read a written instrument before signing is gross negligence and in the absence of proof of fraud or mutual mistake binds the signers and precludes reformation. (Knight v. Kitchin, 237 App. Div. 506 ; Metzger v. Aetna Ins. Co., 227 N. Y. 411 ; Moran v. McLarty, 75 N. Y. 25 ; Pimpinello v. Swift & Co., 253 N. Y. 159 .) III. Failure to prove that a mistake was made in transferring the intent of the parties to a written instrument purporting to express that intent is a bar to reformation. (Miller v. Stuart, 107 Md. 23 ; Henderson v. First Nat. Bank, 229 Ala. 658 ; Weiss v. Turney, 173 F. 2d 617 ; Adkins v. Arsht, 50 F. Supp. 761 ; Prince v. Friedman, 202 Ga. 136 .) IV. The attempted reformation of paragraph “8” by inserting the words 11 or under any other trade name ” was inconsistent with the unreformed basic agreement of sale and created a contract that was invalid as being a restrictive covenant not ancillary to or coextensive with the business being sold. (Gray v. Breckheimer, 193 App. Div. 231 ; Goldsmith v. Goldsmith, 272 App. Div. 1011 ; Ru Ton v. Everitt, 35 App. Div. 412 .) V. The granting of injunctive relief against defendant, Godston, in the judgment reversed by the Appellate Division was erroneous as matter of law. VI. The award against defendant Godston for breach of the restrictive covenant as reformed was based upon an erroneous theory of damages and cannot be sustained. (Wakeman v.
p. 339
Wheeler & Wilson Mfg. Co., 101 N. Y. 205 ; Strough v. Conley, 164 Misc. 248 ; Present v. Glazer, 225 App. Div. 23 ; General Paint Corp. v. Seymour, 124 Cal. App. 611 .)
Stephen J. Ohalek for Westbury Products Corp., respondent.
I. It is error to charge Westbury Products Corp. with obligations which were not agreed to by nor chargeable to Westbury as a party. (Blattmacher v. Brown, 163 Misc. 389 .) II. Knowledge alone and of itself in any person who may also be a director or a stockholder of another corporation is not sufficient to pierce the corporate veil. (Gerard v. Empire Sq. Realty Co., 195 App. Div. 244 ; Knapp v. Rochester Dog Protective Assn., 235 App. Div. 436 ; Berkey v. Third Ave. Ry. Co., 244 N. Y. 84 ; Rapid Tr. Subway Constr. Co. v. City of New York, 259 N. Y. 472 ; Lowendahl v. Baltimore & Ohio R. R. Co., 247 App. Div. 144 ; Stone v. Cleveland C. C. & St. L. R. Co., 202 N. Y. 352 .) III. Injunction against Westbury cannot lie because it was not a party to the contract. (Paige v. Faure, 229 N. Y. 114 ; Nassau Hotel Co. v. Barnett & Barse Corp., 162 App. Div. 381 , 212 N. Y. 568 .)

By written instrument dated February 2, 1955, Food Specialties, Inc., a New Jersey corporation, then engaged in the manufacture of bulk and packaged food items, sold certain of its trade names, trade-marks, copyrights, designs and formulas for a variety of its products, as listed on an attached schedule, together with the good will attached thereto, and nothing else, to the appellants Boss. All items so sold were absolutely warranted as to title and freedom from incumbrance (Contract, pars. 1, 4,10). Among the items so sold was a line of Chinese condiments marketed under the brand name of “ Dai-Day ”.

The contract contained a restrictive covenant in the following terms: “ 8. The Party of the First Part for itself and for its officers, Jerome Stein and John Godston, covenant and agree to and with the Parties of the Second Part, their representatives and assigns, that neither the said Party of the First Part nor Jerome Stein nor John Godston will engage directly or indirectly in any capacity whatsoever in the business of manufacturing or selling Chinese condiments under any trade name heretofore employed by the Party of the First Part, anywhere in the United States of America for a period of two (2) years from the date hereof.”

p. 340
The appellants Ross have brought this action to reform the contract (first cause) on the ground that, by mistake and inadvertence, the restrictive covenant was not correctly worded and, as worded, failed to express the true intent and agreement of the parties in that it omitted between the words “ party of the first part ” and “ anywhere in the United States of America ” the words “ or under any other trade name ”; that in its correct and intended form the restrictive covenant should read: ‘ ‘ that neither the said Party of the First Part nor Jerome Stein nor John Godston will engage directly or indirectly in any capacity whatsoever in the business of manufacturing or selling Chinese condiments under any trade name heretofore employed by the Party of the First Part, or any other trade name anywhere in the United States of America for a period of two (2) years from the date hereof”.

For a second cause, the appellants seek incidental injunctive relief and damages against the defendant Godston as an individual and the Westbury Products Corp. joined as a defendant in this aspect of the case, although not a party to the contract in any way whatsoever, because no doubt of Godston’s personal interest in that company.

We should note too that, at the time the contract was made, Food Specialties was wholly owned by Harold Goldman and respondent, Jerome Stein, his son-in-law, both lawyers, and who, for business reasons, desired to improve the company’s operation by eliminating certain of its lines, including Chinese condiments. While Godston was president of the corporation, he owned no stock. During all times the interested parties, including Ross, knew that Godston was engaged professionally as a food specialist and consultant; that he rendered advice and services to other food manufacturers; that he was actively connected with the Westbury Products Corp. as a stockholder, officer, and personally supervised and managed its manufacturing and selling operations of ingredients for Chinese condiments which it sold under its own brand name “Mil” as well as in bulk to others, and that for some time it had been processing, labeEing and shipping condiments for Food Specialties. Godston did not participate in the preEminary negotiations leading to the making of the within contract. He was called in at the closing. When the subject of a restrictive covenant was

p. 341
brought up, Grodston took the position that he would not sign anything restricting his own activities in the field, stating: “ I would be putting my neck in a noose if I did.” Nonetheless, he was willing to sign, provided the covenant was limited in its application to “ any trade name heretofore employed”. The attorneys for the principal parties then prepared the covenant now sought to be reformed and included same in the contract which was signed and the deal closed.

We have consistently and repeatedly held that before reformation can be granted the plaintiff “ must establish his right to such relief by clear, positive and convincing evidence. Reformation may not be granted upon a probability nor even upon a mere preponderance of evidence, but only upon a certainty of error ’? nor may the plaintiff ‘ ‘ secure reformation merely upon a showing that he or his attorney made a mistake. In the absence of fraud, the mistake shown ‘ must be one made by both parties to the agreement so that the intentions of neither are expressed in it ’ ” (Amend v. Hurley, 293 N. Y. 587 , 595; Salomon v. North British S Mercantile Ins. Co., 215 N. Y. 214 ; Strong v. Reeves, 280 App. Div. 301 , affd. 306 N. Y. 666 ). Here, the proof falls far short of the requirements thus enunciated. Nowhere in the record does it appear that the terms sought to be substituted were ever so framed or mutually agreed upon. It may well be that Ross hoped to get an unlimited restriction, but Grodston, for good reason, did not wish to have his future activities restrained. Reformation is not designed for the purpose of remaking the contract agreed upon but, rather, solely for the purpose of stating correctly a mutual mistake shared by both parties to the contract; in other words, it provides an equitable remedy for use when it clearly and convincingly appears that the contract, as written, does not embody the true agreement as mutually intended.

Furthermore, the covenant as originally drawn was coextensive with the recital clause, the subject matter of the sale and the recapture clause, all of which have been approved by both purchaser and seller and stand unreformed and uncontradicted. Plaintiffs make no claim that the reformation should extend to any part of the contract other than the restrictive covenant as contained in paragraph 8. What they seek in

Dissent

p. 342
effect is a new and radically different contract by converting the covenant as drawn from a limited to an unlimited restriction. Having failed to establish their right thereto, it necessarily follows that there is also no right to injunctive relief or for damage.

The judgment appealed from is affirmed, with costs.

We dissent and vote to reverse, and to reinstate the final and interlocutory judgments of the Official Referee insofar as appealed from, upon the ground that the weight of the evidence clearly and convincingly supports the determination of said Referee rather than that of the Appellate Division.

The action is for reformation of a restrictive covenant entered into in connection with a contract of sale, and for other relief. The restrictive covenant as written is set forth in the prevailing opinion. It was reformed so as to relate not only to the manufacturing or selling of Chinese condiments “under any trade name heretofore employed ” by Food Specialties, Inc., but also to such condiments manufactured or sold “ under any other trade name ”. It was concededly limited in place to the United States and in time to a period of two years.

There is no dispute that defendant Jerome Stein, an attorney, who signed the contract on behalf of Food Specialties, Inc., acknowledged that the covenant as reformed was the one agreed upon. He also testified unequivocally that the defendant “ Mr. Godston said he would sign a restrictive covenant limiting him from engaging in the business of manufacturing or selling Chinese condiments anywhere in the United States for a period of two years Harold Goldman, the principal stockholder of Food Specialties, Inc., testified similarly.

Godston was president and general manager and practically in charge of all the affairs of Food Specialties, Inc., though he had no stock interest therein. He owned a half interest in defendant Westbury Products Corp. He at first was disinclined to sign the restrictive covenant, but, when Goldman promised to pay him the sum of $10,000, Godston agreed.

The covenant as originally written was pointless, because plaintiff, Ross, paid $85,000 for the Food Specialties business, which included the latter’s trade names, trade-marks, copyrights, designs and formulas, together with the good will

p. 343
attached thereto; its stock, inventory and equipment. Since he purchased these rights, he did not need a restrictive covenant from Stein or Godston, officers of Food Specialties, Inc., as to the “ Chinese condiments under any trade name heretofore employed by the Party of the First Part ”. The only sensible purpose of the covenant was to include Chinese condiments not under such trade name.

Godston recognized the mistake promptly, for a day or two after the closing on February 2, 1955 he consulted a lawyer concerning the scope of the covenant and then saw two other lawyers. He then learned he had not tied “ a rope around [his] neck ”. While it is true that he denied that there was a mistake, that does not make the evidence of plaintiff’s witnesses any less clear and convincing. If he had admitted it, there would of course have been no litigation.

Godston had first been offered the opportunity of purchasing said business by Goldman, the principal stockholder, but he declined. Goldman then asked him to help sell it to Boss, for which Godston was paid $10,000. As soon as the sale to Boss had been made, Westbury Products Corp., in which Godston had a half interest, went into competition with Food Specialties in the sale of Chinese condiments. The restrictive covenant as written at the time of the sale was clearly of no value whatsoever to Boss, for the purchase of the trade names, etc., gave him that protection. The only reasonable purpose of a restrictive covenant was to keep Godston from competing in Chinese condiments generally for the two-year period agreed upon.

In McKeon v. Van Slyck, ( 223 N. Y. 392 , 397-398) Judge Ora^e stated the applicable rule of evidence as follows: ‘ ‘ In civil cases a plaintiff is never required to prove his case by more than a preponderance of evidence * * *. They [the jury] may, therefore, be properly instructed that to make out a preponderance, the evidence should be clear and convincing [citing case]. But all these instructions in the last analysis are mere counsels of caution. The responsibility of determining whether the evidence is clear and convincing must ultimately rest upon the jury subject, of course, to the power of the court to set aside their verdict”

p. 344
The learned and experienced Official Referee, who saw Goldman, Stein and Godston on the witness stand and heard them testify, gave no credit to Godston’s claim that the written covenant expressed the true intention of the parties. As Judge Rippey said in Amend v. Hurley ( 293 N. Y. 587 , 594): “ The advantages of the trial court who saw and heard the witnesses should be considered and, when truth hangs upon the credibility of witnesses, his decision should be given the greatest weight [citing cases].” (See, also, Roberts v. Fulmer, 301 N. Y. 277 , 285.)

In our judgment, the evidence clearly, convincingly and overwhelmingly supports the determination of the Official Referee, and the majority of the Appellate Division were in error in reversing and making new findings.

The judgment appealed from should be reversed, and the interlocutory and final judgments of the Official Referee should be reinstated, with costs.

Judges Desmond, Van Voorhis and Burns concur with Judge Dye; Judge Froessel dissents in an opinion in which Chief Judge Conway and Judge Fuld concur.

Judgment affirmed.

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