Elements of a Valid Contract: Non-Compete Clause Analysis

Overview of the Contract

Fabulous Hotel has engaged my services as an employee — my position being that of head chef — under an employment contract that spans two years. Two years into the contract, another hotel expresses interest in my services. The problem is that the employment contract contains a paragraph that reads as follows:

"The below-signed agrees not to work as a chef for another hotel in the same metropolitan area for a period of two years after leaving our employ."

Of key importance in this case is whether the said contract is enforceable. What elements must this particular contract satisfy for it to be enforceable? Are there any circumstances under which this agreement would be unenforceable? These are the central questions addressed in the sections that follow.

Elements of a Valid Contract

A number of elements must be present for a given agreement to be recognized as a legally binding contract. If any of these elements is missing or absent, the agreement cannot be deemed a contract from a legal perspective. The five elements of a valid contract identified by Seaquist (2012, p. 138) are "offer, acceptance, consideration, capacity, and legality." Each element is discussed below.

Two of the parties in this scenario are the offeror and the offeree. According to Seaquist (2012), these are the two key parties involved in the formation of a contract. One of the parties promises to either engage in, or refrain from, some specified action — either upon commencement of the contract or at some future point. It is the offeror who makes an offer and awaits its acceptance or rejection by the offeree. An offer is therefore simply an expression of the offeror's willingness to enter into a contract. If the offer is accepted, the offeror will be legally bound by it.

It is also important to note that, according to Seaquist (2012), two other outcomes — in addition to rejection and acceptance — may follow the making of an offer: the offer could lapse or be revoked. Lapsing refers to the fact that an offer does not last forever; depending on the circumstances, an offer may expire after a specified period of time has passed (Seaquist, 2012, p. 142). Revocation is the offeror's decision to withdraw the offer. To be effective in law, revocation must occur before acceptance takes place.

In the words of Twomey and Jennings (2013, p. 271), acceptance "is the assent of the offeree to the terms of the offer." In most cases, acceptance may be made orally or in writing. It is the acceptance of the offer by the offeree that constitutes what is known as an agreement. Some scholars view offer and acceptance as inseparable. In establishing a contractual relationship, "one party must offer to enter into a legal agreement, and another party must accept the terms of the offer" (Miller, 2011, p. 192).

Consideration is another essential element of a valid contract. According to Miller and Jentz (2007), "any promises made by parties must be supported by legally sufficient and bargained-for consideration." This may be something of value that is promised or received with the intention of inducing the other party to enter into a deal. The consideration should originate from the promisor. Common forms of consideration include, but are not limited to, goods, services, and money.

Capacity, according to Seaquist (2012), concerns the mental state of the contracting parties. As the author explains, "a party who lacks capacity does not have the ability to understand the consequences of entering into a contract" (Seaquist, 2012, p. 145). Two factors are typically taken into account: mental competence and age. Parties entering into a contract must therefore possess the contractual capacity to do so, as Miller and Jentz (2007) point out. Those who may lack capacity include minors, intoxicated individuals, and persons with mental disorders.

The final element is legality. According to Miller (2011), a contract must be entered into for a legal purpose — that is, to accomplish a lawful undertaking. A contract that violates public policy or is illegal in some way cannot be deemed valid. It is important to note, however, that "an illegal contract is one that is defined by the law of its state as being illegal" (Seaquist, 2012, p. 147). Other contracts that some states may consider illegal include non-competition agreements that are overly broad, and contracts that fail to adhere to specific licensing requirements (Seaquist, 2012).

Common Law Governance of the Contract

The contract in question is governed by common law. This is because it involves personal services — specifically, the hiring of an individual as a professional employee. According to Seaquist (2012), examples of common law contracts include insurance, real estate, and personal services such as employing a professional. As the head chef of Fabulous Hotel, I have been hired as an employee, and the contract I signed therefore falls under the governance of common law.

Conclusion

For the employment contract signed with Fabulous Hotel to be enforceable, it must satisfy all five elements of a valid contract: offer, acceptance, consideration, capacity, and legality. As a personal-services agreement, it is governed by common law. However, should it be established that the contract was signed under duress or undue influence, strong legal defenses exist that could render the non-compete clause — and potentially the broader agreement — unenforceable.

References

Miller, R. (2011). Modern Principles of Business Law: Contracts, the UCC, and Business Organizations. Mason, OH: Cengage Learning.

Miller, R., & Jentz, G. (2007). Business Law Today: The Essentials (8th ed.). Mason, OH: Cengage Learning.

Seaquist, G. (2012). Business Law for Managers. San Diego, CA: Bridgepoint Education, Inc.

Twomey, D., & Jennings, M. (2013). Business Law and the Legal Environment (22nd ed.). Mason, OH: Cengage Learning.