The plaintiff and L were partners in a business for the manufacture of ambulances under the firm name of L. By a contract dated 24 January/26 March 1923 they sold the business to the D.O.W. company which continued the business under the original name of L. Clause 1 of the contract dealt with the sale of the machinery and the raw materials. Clause 2 provided that in view of the assignment of the patents and similar rights together with all non-pecuniary assets, such as business connections, sales opportunities etc., the plaintiff and L were to receive for ten years a share in half the sales volume of ambulances produced after the sale of the business, which share was to amount to 7% in the first year and to 5% thereafter. Clause 3 provided that the plaintiff was to be taken over by the new firm and was to be employed in a leading position. The business was transferred on 1 March 1923, and the plaintiff was engaged as commercial manager by a contract dated 14 April 1923. He left the defendant's employment on 31 December 1923 and received 6 months' salary as compensation.

The plaintiff alleged that the accounts supplied to him of sales completed had been defective and that since 1 May he had not received the payments stipulated by clause 2 of the contract. He claimed, first, 4352.66 Marks plus interest and an account of the sales of ambulances concluded since 1 January 1924 and, secondly, payment of 2_% of the sales value of the ambulances as evidenced by the accounts to be delivered.

The defendant contended the plaintiff had started again to manufacture ambulances in competition with the defendant after he had left the defendant's employment. This activity was in violation of clause 2 of the contract while, in breach of the contract, the plaintiff could not claim his share in the turnover; instead he was liable in damages. The plaintiff replied that clause 2 did not prohibit him from competing. Moreover, after he had been given notice by the plaintiff he had no choice but to resume work in an area in which he was an expert.

The District Court of Berlin gave judgment for the plaintiff, and the judgment was affirmed by the Kammergericht. Upon a second appeal by the defendant the judgment of the court below was quashed and the case referred back for the following

Reasons

"... The contracts of 24 January/26 March 1923, apart from dealing with the sale of the business, also contains the provision that the plaintiff is to be taken on a leading capacity by the firm which was to be set up, subject to conditions still to be fixed. He was so employed by the contract of 14 April 1923. It does not contain a provision in restraint of trade in respect of the time after the plaintiff has left the defendant's employment. The defendant does not rely on an agreement in restraint of trade concluded between a merchant and his commercial assistant, to be governed by para. 74 ff, HGB [Commercial Code]. Instead he contends that the competition by the plaintiff constituted a violation of clause 2 of the contract of sale, since by engaging in competing activities he acted contrary to his obligation to assign to the defendant all the non-pecuniary assets of the business.

The Kammergericht proceeds correctly from the principle that a restraint of trade imposed upon the vendor as part of a sale of a business may also be agreed upon tacitly ... the interpretation of clause 2 of the contract by the District Court and by the Kammergericht is open to criticism, since it adheres excessively to the literal meaning of this contractual clause and overlooks its importance according to good faith.

Clause 2 provides that the plaintiff and L must assign to the defendant all non-pecuniary assets of the firm, in particular patents and similar rights, business connections and sales opportunities in consideration of a percentage share of the plaintiff and L for a period of ten years in the sales value of all ambulances sold during this time. The defendant has stated ... that [certain governmental authorities] were and are the principal customers, and that it is in the business with these that the plaintiff has competed with the defendant since May 1924 by producing and delivering the same type of car. If this should be true, the plaintiff has complied with his contractual duty to transfer the sales opportunities to the defendant to the extent that he has introduced the defendant to [the governmental authorities] as a supplier. The question is, however, whether this exhausts his contractual obligation or whether after he had left the defendant's employment - even if no prohibition to compete had been imposed upon him in his capacity as a commercial assistant - he was under a duty not to compete at all with the defendant, as long as he was to have and to retain a share in the profits ...

A merchant who promises as a consideration to the opposite party in a contract for the transfer of a business and its customers ... a share in the profits for the duration of ten years assumes that during this period in which the vendor is to participate in the results of the business, he will obtain the benefit of the custom of those clients which the vendor would have obtained, if he had retained the business. The vendor cannot reasonably expect that the buyer will permit him to recover by starting a competing business, the customers whose transfer to the buyer was to lead to the profit to be shared, while claiming nevertheless his share of the profits in the business which had been sold. The opposite view would demand of the defendant that he must supply a competitor continuously with money, thus enabling the latter to undercut him and possibly to drive him out of business. Such a result would not accord with the presumed intention of reasonable and honest merchants. Consequently, according to good faith, clause 2 of the contract ... can only be interpreted to mean that the plaintiff's share of the profits for the duration of ten years is balanced by his contractual duty, limited to the same period and independent of his remaining in the employment of the defendant firm, not to deprive the defendant of the non-pecuniary assets assigned to the latter, in particular of the customers, or to reduce them in their value. To act otherwise would frustrate the purpose of the contract, which was to transfer to the defendant the profit from the business to the same extent as it had been enjoyed by the plaintiff and L.

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