Elements of a Contract
Contracts are involved in many different situations that occur every day. They are voluntary arrangements between two or more parties in which an agreement has been reached by all parties. Once the agreement has been reached, all parties then acknowledge the terms and conditions that are identified in the contract. In this paper, contracts in general, the five elements that would make a contract enforceable, why a particular contract situation is governed by common law or the Uniform Commercial Code, as well as identify circumstances in which a non-compete agreement would be enforceable will be discussed.
There are also many different legal types of contracts. The basic ones are written contracts, verbal contracts, standard form contracts and period contracts. They vary with benefits and with risks involved, but each relies of communication in order to come to an agreement. When parties enter into a contract, they are agreeing to do some form of work in exchange for some type of benefit, usually in the form of a payment.
Contracts that are clearly written and state the details of the agreement are called written contracts. These types of contracts minimize risks and ensure the terms are agreed upon by both parties. There are many benefits of having a written contract, beginning with the obvious details of the agreement. These types of contracts also help to avoid confusion and disputes, specify how the contract can be ended, detail payment plans and timeframes and document how the terms of the contract can be varied.
Verbal contracts are those that are spoken and agreed upon, sometimes with a handshake to accept agreements of the terms. While these can be legally binding, they are harder to prove in court. These are a higher risk contract because the rights and obligations of each party may be unclear.
Contracts that are prepared in advance and only leave black spaces for the names, dates and signatures are known as standard form contracts. These are usually prepared by one of the parties and can tend to shift more of the risk to the other party. These can cause more risk for one party because the terms that they sign may not be the ones that were agreed upon. If the details do not match the agreement, once both parties have signed the contract, it is now enforceable.
Period contracts are usually seen in the construction business and contain a certain length of time in which work will be done. The business will utilize the services of the second company in periodic times in case they need particular services done at different times (Seaquist, 2012, sec. 9.2). A relationship between a plumber and a hotel would show an instance in which this type of contract would be used. The hotel would use the same plumbing company at various times when they would require a plumber to come out. The contract would not fully end until the companies terminated the contract, but each time that the hotel used the plumbing company to complete work, both companies would sign an addendum to add to the overall contract.
There are five different elements that make a contract enforceable. These elements are offer, acceptance, consideration, capacity, and legality. In order to get a better idea of what each of these has to do with contracts, they will be discussed individually and then explained as to how they factor into the contract as a whole and make it enforceable.
Offer is the first element that is involved when creating a contract. Once an offer is made to another party, the offeree now has the option to accept the service or good. If the offeree likes the offer, then the two parties begin preliminary negotiations to work out the details. Once an offer is made to offeree, there are four options for the offeree to take. There is the lapse, revocation, rejection and acceptance. If an offer lapses, or runs out of time, there is no contract. When an offeror revokes their offer before the offeree has a chance to accept the offer, there is once again no contract. The rejection of an offer obviously means there is no contract, but with this one, the offeree can now make an offer to the original offeror. This is a counteroffer and now the offeror has a chance to accept the new offer and if they do accept, they can establish a contract. When an offeree makes the choice to accept the offer from the offeror, they may now establish a contract (Seaquist, 2012, sec. 9.2).
After the initial offer, if an individual accepts the terms of the offer than a contract is created. This would lead into the acceptance element of the contract. It is important to know whether the contract will fall under the Uniform Commission Code or under the common law. These two organizations deal with different types of contracts and so the factors of each one are different. If an offer is accepted under the common law than there is a mirror image rule that means that the offer and the acceptance have to match the exact same terms. If the offer and the acceptance differ at all, then it is considered a counteroffer and no longer an acceptance.
Contracts created that deal with the sale of goods would be covered under the Uniform Commercial code. This code does not cover real estate, employment, insurance, and other services, therefore the conditions of employment in a contract would not be covered under this code (Seaquist, 2012, sec. 9.2).
Consideration is another one of the elements that are required in order for a contract to be enforceable. This simply means that there is a promise made by an individual and that promise causes another individual to do something that they were not originally legally supposed to do. There must be evidence that the promise does something that they were not legally bound to do in order to attain the promise from the promiser (Seaquist, 2012, sec. 9.2).
When it comes to contracts, the individual must consider the mental competence of the individual that they are going into a contract with. This leads into the next element of a contract, called capacity. If an individual does not have the mental capacity or is considered a minor, they cannot legally understand the consequences of entering a contract. If an individual that lacks the mental capacity to enter into a contract, they are only able to under the supervision of a guardian.
Minors are able to enter into voidable contracts, such as car buying, but they are able to disaffirm the contract by returning the item. They cannot be held liable for a breach of contract in any case because they are not 18 and therefore have not reached majority yet. In cases like these, a minor can ratify their contract and become legally responsible for the contract when they become 18. If a minor is emancipated however, they are held liable for the contracts they enter that are business related (if they have a business) but can still disaffirm any contracts that are not business-related (Seaquist, 2012, sec. 9.2).
The last element of an enforceable contract is the legality element. The legality of a contract can only be proven if the products or services are considered legal. There are several other factors that have to be considered when it comes to the legal aspect of a contract. Sunday Contracts, overly broad noncompetition clauses, exculpatory agreements, and failure to follow licensing requirements can all affect whether or not a contract is considered legal.
Sunday contracts, or Blue Laws, mean that individuals cannot enter into a contract on a Sunday. In some states, this can sometimes be considered void due to religious reasons. The noncompetition clause is used to keep individuals from working in competing businesses of the original employer. An exculpatory agreement is a waiver of liability and can considered illegal and void in most cases. The failure to follow licensing requirement simply means that if two parties enter a contract and the individual providing the service is unlicensed, the other individual is able to choose not to pay for the service. This does not apply to businesses that are raising revenue for the state, such as a liquor license (Seaquist, 2012, sec. 9.2).
In this particular situation, the common law would handle the contract. This is because the contract would be considered a condition of employment. The employee that took the head chef position at the Fabulous Hotel signed the contract that stated that they would not work as a chef in another hotel in the same metropolitan area. When the individual was offered a position as a chef at a different hotel, after their two-year employment with the Fabulous Hotel. Due to this being signed in the original employee contract, the employee cannot accept the job without judicial discretion.
In a case such as this, the case would need to be given judicial discretion before the employee took another chef job at the second hotel. According to Mullins (2014), many lawmakers are now considering restricting employers from allowing employees to sign these agreements (para. 7). When considering the legal dispute of this situation, there are two main factors that need to be considered. The first factor would be the size of the area and the second would be the length of time given.
Metropolitan areas can be very large areas. There are no clear lines that determine how much of an area is too large, so it is at the discretion of the judge. If the judge decides that a metropolitan area is too great for the situation, they may limit the area restriction to the county in which the Fabulous Hotel is located. This would prohibit the individual from working for a competing hotel in the same county. According to Kessler, Bass, and Yeargain (2007), companies tend to use the non-compete agreements in order to prevent their employees from taking knowledge and skills that they learn while employed in the company and apply it to competing companies once they are hired (p. 13). The reason behind the non-competition agreement is simply because the company does not want the employee to disclose any confidential information or trade secrets with the competing company (Mayfield, & Cordell, 2016, p.86).
Kessler, Bass, and Yeargain (2007) proposed that companies begin using “cost sharing” to help to eliminate the need for the non-compete agreement, especially in the areas which have limited employment opportunities (p.18). This would specify an amount of time that the employee would have to work for the company, to ensure that the employer is getting their share from the amount the company would have to pay for training of the employee.
The second factor, length of time, would need to be considered because two years can be considered a long time in which an individual cannot work at a job that they desire. Depending on the size of the metropolitan area in which the Fabulous Hotel is located, there could be a limited employment opportunity for the individual and so it may be something for the judge to consider.
Although each case is considered different depending on the state, there are five guidelines that most states scrutinize when considering the terms of a non-compete agreement. These five guidelines are reasonableness, duration, geographic scope, activity and independent consideration (Mayfield, & Cordell, 2016, p.86). This means that with each situation, the reasonableness to keep the agreement is a legitimate interest of the business and not inflicting any hardship on the former employee. The duration of the non-compete agreement has to have a timeframe in which it is in effect and take the geographic location of the agreement into consideration. The activity must be limited to the specific service to which the employee was assigned and ensure that there is consideration for each individual situation.
In conclusion, contracts are involved in so many situations, both with business and with individuals. They can sometimes be very detail-oriented and sometimes they can be a fill-in-the-blank and sign here situation. Each contract has rules and legalities which could be very costly and time-consuming to work out. This paper discussed contracts and their rules, as well as what makes a contract enforceable, which situations would be covered by common law and the Uniform Commercial Code, and discussed a particular situation in which a non-compete agreement would be enforceable.
Seaquist, G. (2012). Business Law for Managers. San Diego, CA: Bridgepoint Education, Inc.
Retrieved from https://content.ashford.edu/books/AUBUS670.12.2/sections/ch9
Mayfield, E. H., & Cordell, J. (2016). WHAT EVERY COLLEGE STUDENT SHOULD KNOW ABOUT NON-COMPETE AGREEMENTS. Journal of the International Academy for Case Studies, 22(2), 85-89. Retrieved from http://search.proquest.com/docview/1804899691?accountid=32521
MULLINS, R. (2014). NON-COMPETE AGREEMENTS: DON’T JUST SIGN ON THE DOTTED LINE. Journal of Property Management, 79(4), 26.
Kessler, L. L., Bass, A. N., & Yeargain, J. W. (2007). YOU BELONG TO ME: EMPLOYER ATTEMPTS TO KEEP EMPLOYEES FROM QUITTING TO WORK FOR COMPETITORS VIA NON-COMPETE AGREEMENTS IN EMPLOYMENT CONTRACTS. Journal of Legal, Ethical and Regulatory Issues, 10(2), 13-23. Retrieved from http://search.proquest.com/docview/216238808?accountid=32521