Contract Law Fundamentals: Verbal Agreements to Covenants

Verbal Contract and Promissory Estoppel

A contract is "a set of legally enforceable promises" (p. 304). From this simple definition, it would seem that a verbal contract did indeed exist between the two parties in question. Jacob told Henry he would be receiving an extra week of vacation. The form of the contract may be verbal, and the contract may be informal and simple. However, a legal contract exists in this case even if injustice cannot be established. The courts would have a difficult time establishing willful breach, although it is possible that Henry would be able to secure his extra week of vacation.

There are four cornerstones of contract law. The four elements of a contract include the agreement, the consideration, the contractual capacity, and the legal object (p. 304). The agreement is the offer—in this case, Jacob's offer to grant Henry an extra week of vacation. This case illustrates a unilateral contract, in which Jacob is offering to give something to Henry. Henry's agreement is the acceptance of that offer. In this case, there is a consideration—a promise to do something for Henry. It is not as if Jacob told Henry that he had to complete a certain amount of work in order to earn the vacation; Jacob told Henry that he had already earned the extra week. There is also a clear legal capacity on the part of both Henry and Jacob. Jacob could not claim that either he or Henry were incapable of entering into the contract—for instance, by claiming one party was intoxicated at the time.

This case illustrates the condition of promissory estoppel. One party (Jacob) makes a promise knowing that the other party (Henry) will rely on it, and the other party (Henry) does rely on the promise of extra vacation time. The only way for Jacob to avoid injustice is to fulfill the promise. Even if injustice cannot be proven in court, Henry can still sue Jacob under promissory estoppel and potentially receive some form of financial compensation.

Covenant Not to Compete in a Business Sale

A covenant not to compete is a type of contract that restricts trade. Such covenants are not widely used in order to protect consumers, stimulate competition, and avoid conflict with antitrust law. However, there are clear circumstances in which covenants not to compete are valid, usable, and enforceable. Covenants not to compete are also called restrictive covenants. There are two types: the first pertains to an employee leaving a company that wants to protect its trade secrets; the second involves a fair sale, as it does in this case.

"Public policy requires fairness in business transactions, which does not occur when people profit from the sale of a business and then start a new business that destroys the one they just sold" (text, p. 370). Maurice had Todd sign a covenant not to compete that prohibited Todd from opening a similar restaurant within 25 miles of Tasty Burger within one year. Given the terms of the sale, the covenant not to compete is likely to be enforced to protect the fairness of the original transaction. After one year, Todd is free to do as he pleases, because it is assumed that Maurice can at that point establish his brand without the burden of Todd's competition.

Covenants not to compete must be enforced thoughtfully. They cannot restrict healthy competition, but they must also not impede legitimate businesses from becoming established. This case illustrates a sound covenant not to compete because it specifies a clear time frame in the original contract. It is not as if Maurice expects Todd never to compete; only that Maurice be given the opportunity to compete himself as a term of the sale.