Buyer failed to convince the Alabama Supreme Court that the noncompete was a personal service contract terminable upon the death of the seller owner.
May 12, 2021
A covenant not to compete is generally given by the owner of the sold business to protect the value of the goodwill of the business purchased by the buyer. And often significant noncompete payments are paid after the closing over a period of years.
This deal involved the stock sale by the founder of the target which was a wholesale distributor of construction and highway-industry products. The buyer was the target’s president. The seller/founder gave a noncompete to the buyer in exchange for over $2 million, payable in 120 post closing monthly payments.
The seller died 7 years after the closing and the buyer stopped making the monthly noncompete payments. The seller’s estate sued for the remaining payments of $641K, and the dispute ended up in the Alabama Supreme Court.
The buyer argued that the noncompete was a personal service contract which was terminable upon the seller’s death. The Alabama high court disagreed. It held that the essential benefit of the noncompete was a purchase of the business’s goodwill (as opposed to the seller’s expertise), so the seller’s death did not deprive the buyer of this benefit. “Thus, the noncompete was not a personal-service contract in which ‘personal performance by the promisor is of the essence.’ ... And because it is not a personal-service contract, the noncompete ‘survives the death of the decedent’ and the … (the seller’s estate) … has the right to enforce the noncompete.”
This case is referred to as Boyd v. Mills, No. 1190615, Supreme Court of Alabama, (April 23, 2021).
There was a dispute because the noncompete did not specify whether the payments stopped upon the seller’s death. That could have been fixed either way by saying so in the noncompete.
By John McCauley: I help people manage M&A legal risks.
Telephone: 714 273-6291
The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.