Western Electric Company v. Brenner, 41 N.Y.2d 291 (1977)
An action by an employer against an employee for money received by the employee in violation of their duty of loyalty is governed by the contract statute of limitations, not the tort statute of limitations.
Summary
Western Electric sued a former employee, Brenner, alleging he accepted a $50,000 kickback from a construction company in exchange for influencing Western Electric to award the company a contract. Western Electric claimed Brenner breached his duty of loyalty and sought restitution. Brenner moved to dismiss, arguing the action was time-barred by the three-year statute of limitations for torts. The lower courts denied the motion, holding the action sounded in contract, subject to a six-year statute of limitations. The New York Court of Appeals affirmed, holding the gravamen of the action was breach of contract due to the employer-employee relationship, and the longer statute of limitations applied. The court emphasized the duty of loyalty arising from the contractual relationship.
Facts
Brenner was a senior contract specialist for Western Electric. His responsibilities included initiating and negotiating contracts. Brenner allegedly secured a construction contract for J. L. Williams Company. Brenner purportedly demanded and received $50,000 from J. L. Williams Company in exchange for his efforts in securing the contract. The payments were made in two installments in August and December of 1971. Western Electric claimed Brenner’s actions breached his duty of faithfulness and trust.
Procedural History
Western Electric commenced the action in May 1975. Brenner moved to dismiss, arguing the three-year statute of limitations for tortious conduct barred the action. Special Term denied the motion, finding the action based on breach of contract and duties of trust. The Appellate Division affirmed. The Court of Appeals granted leave to appeal and certified the question of whether the lower court’s order was properly made.
Issue(s)
Whether the cause of action brought by Western Electric against Brenner for allegedly receiving money in violation of his duty of loyalty is governed by the statute of limitations for contract or tort?
Holding
Yes, the order of the Appellate Division was properly made because contract, not tort, forms the basis of Western Electric’s causes of action.
Court’s Reasoning
The court determined that the essence of the cause of action determines the applicable statute of limitations. While Brenner argued the action was for wrongful injury to property, the court noted that the General Construction Law excepts breaches of contract from its definition of injury to property. The court distinguished cases involving negligence, where the gravamen of the action is the breach of a duty to use due care. Here, the lawsuit stemmed from Brenner’s breach of his duty of loyalty as an employee. “Absent the relationship between the parties, there would be no duty to be breached, no wrong, and, thus, no cause of action.” The court emphasized that the employer-employee relationship is contractual, and fundamental to that relationship is the employee’s duty to act with the utmost good faith and loyalty. The court cited agency law, stating that an employee must give any profit or benefit received in connection with transactions on behalf of the employer to the employer. Further, any compensation secretly received is deemed held in constructive trust for the employer. The court quoted Lamdin v. Broadway Surface Adv. Corp., 272 N.Y. 133, 138 stating that an employee is “prohibited from acting in any manner inconsistent with his agency or trust and is at all times bound to exercise the utmost good faith and loyalty in the performance of his duties”. Although alternative remedies might sound in tort, the claim was essentially contractual.