Contractual Imposition of a Penalty for Breach Violates Connecticut Law & Policy

Case Background

Mr. Stan Manousos and Mr. Edward Kennedy were part owners of Park, Ride & Fly, Inc., the largest operator of valet parking lots servicing Bradley International Airport.  In late 1991 they expressed interest in purchasing Airport Valet from Mr. Robert Gosselin in order to expand their business operations.  The parties executed a lease-purchase agreement on March 31, 1992, because Manousos and Kennedy did not have enough cash on hand to outright acquire Airport Valet.  They insisted on a non-compete agreement in conjunction with the lease-purchase agreement because they did not want Mr. Gosselin to use his experience in the valet parking industry to compete with them while he was receiving the lease payments.

The main stipulations of the restrictive covenant were that Mr. Gosselin was prohibited from competing, directly or indirectly, in the operation of any commercial parking lot with five (5) miles of Bradley International Airport for five (5) years following the execution of the agreement.  Pursuant to the agreement, Mr. Manousos and Mr. Kennedy were entitled to enforcement of the non-compete agreement and could withhold payments otherwise due under the lease-purchase agreement in the event of a breach.

Clause Change in the Agreement

Before executing the non-compete agreement, Mr. Gosselin had his son changed the working of a specific clause that served as an exception to the general prohibition on competing business activities.  The clause originally stated that Mr. Gosselin could continue to provide valet services to “patrons of the Brady International Inn”, a hotel that he had owed for quite some time prior to the transaction with Mr. Manousos and Mr. Kennedy where “patrons” referred to persons that were overnight guests at the Bradley International Inn.

The change to the provision made it read: “it shall not be a violation of this Non-Compete Agreement for Gosselin to provide parking and shuttle services at Bradley International Inn”.  This change would allow Mr. Gosselin to provide services to a broader customer base that just those identified as overnight guests of the Bradley International Inn.

Mr. Manousos and Mr. Kennedy discovered this change to the non-compete agreement in the fall of 1992 after a few incidents with customers and closely examining the language of the contract.  They commenced an action against Mr. Gosselin requesting the enforcement of the covenant not to compete.  Mr. Gosselin argued that the non-compete agreement was unenforceable because it constituted an unreasonable restraint of trade. The court disagreed with this contention and held that the restrictions contained in the non-compete agreement were reasonable, lawful, and enforceable.

The Court’s Decision

The court reiterated the policy that a non-compete agreement ancillary to a lawfully executed contract is legitimate and enforceable if the restrain is reasonable given the specific circumstances of the parties and their transaction.  Furthermore, the court noted that the execution of the lease-purchase contract was predicated on the inclusion of a covenant not to compete and was a valuable business asset for Mr. Manousos and Mr. Kennedy.

The court recognized Mr. Manousos and Mr. Kennedy’s reliance on the non-compete agreement when executing the lease-purchase agreement and concluded that they were entitled to enforcement of its provisions.  Accordingly, the court enjoined Mr. Gosselin from directly or indirectly competing in the commercial parking industry servicing Bradley International Airport within five miles of the airport until April 1, 1997 (the expiration of the proscribed five year prohibition in the non-compete agreement).

Additionally, the court clarified that any valet services provided at the Bradley International Inn to persons other than “registered overnight guests” would constitute a violation.  The court however determined that Mr. Manousos and Mr. Kennedy could not withhold the lease payments because the imposition of a penalty for breach of contract is invalid and in violation of Connecticut law and policy.  A liquidated damages clause may be enforceable under certain conditions but the court determined that the amount identified by the parties was unreasonable and therefore unenforceable.

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