The Importance of Non-Compete Agreement in Business

Various laws govern the contractual relationship; therefore, contracts must contain certain elements to be considered valid, including offer, acceptance, consideration, capability, and legality (Seaquist, 2012). Each of the aspects provides contract enforceability that protects the parties’ interests in the event of a dispute. Depending on the contract’s purpose, it is regulated by different laws and may contain a non-compete agreement. The terms of such an agreement can often be unfair and excessively restrictive, which is the basis for appealing it.

For a contract to be considered valid and enforceable, it must contain five elements. First of all, one party makes an offer, which the other party can either accept or reject (Seaquist, 2012). An offer includes a proposal of terms and is an “objective manifestation of intentions” (Chen-Wishart, 2018, p. 55). Thus, the offeror expresses his readiness to fulfill the specified contract conditions as soon as the offeree agrees to accept them. Agreeing without an offer is impossible since this is the first stage in establishing bilateral contractual relations. Disputes often arise as to whether an offer was made or only an intention to treat was expressed (Chen-Wishart, 2018). The reason is that the offer can be presented either in written or oral form, which can cause difficulties in separating a legally binding offer and preliminary negotiation.

While preliminary negotiation is not enforceable, the offer has three distinctive characteristics making it valid. Firstly, the offer must be articulated in a certain and defined language. Second, the intent must look like entering into a contractual relationship. Third, the offer must be presented to the offeree in its final form (Seaquist, 2012). In the event of a dispute, the third party can objectively assess the offer’s legitimacy based on these criteria (Chen-Wishart, 2018). Thus, the offeror provides an opportunity to bind him to specific contractual terms if the offeree accepts them.

The communicated offer gives the receiving party the right to accept or reject the terms. Acceptance is the only way to form a contract between the two parties (Seaquist, 2012). At this stage of the relations, it is important to determine by what law the agreement is governed. In common law, articulating the terms in the acceptance must exactly repeat the articulation of the terms in the offer. Any deviation from this rule leads to submitting a counteroffer, which is considered a proposal of new conditions terminating the original offer. Therefore, the offeror, in this case, is free from binding since the offeree no longer has the right to accept the initial offer (Chen-Wishart, 2018). If the contract is governed by the Uniform Commercial Code (UCC), no such conditions are imposed. Therefore, in the case of a counteroffer, the entire contracting process can be continued (textbook). Thus, the form of expression of acceptance is determined by the purpose of the contract and the law under which it will be executed.

The third element of a contract, which makes it valid and enforceable, is a consideration. It is an essential concept for contract law implying “that the promise by the promisor gets the promisee to do something he or she was not previously legally bound to do” (Seaquist, 2012, p. 144). An important aspect of consideration is that “something of legally sufficient value must be given in exchange for a promise” (Miller, 2018, p. 237). However, situations often arise when one of the parties argues consideration is insufficient. There are several cases when consideration can be deemed unenforceable, rendering the contract invalid. If one of the parties is already legally obliged to perform something, it cannot be a subject for the contract consideration. Already fulfilled obligations also cannot be recognized as enforceable since there is no subject for consideration. If a promiser does not articulate promised performances clearly, they may be considered illusory and unenforceable (Miller, 2018). Thus, consideration is a form of legal equivalent exchange of promises between contracting parties.

The next contract element is capacity, which determines the mental possibilities of understanding and accepting responsibility for parties’ consequences. The aspect implies that parties of the contractual relationship are not legally incompetent due to mental disabilities and are fully aware of the contract they enter (Seaquist, 2012). The element also separately defines the role of minors in the contracting process (Seaquist, 2012). Thus, a contract can be considered legal and enforceable only if legally capable parties conclude it.

The last and fifth element of the contract is its legality, without which all other elements will be invalid. This premise implies that contracts must be subject to the specific territory laws they are concluded and will be executed (Seaquist, 2012). For example, the laws in different states may differ from each other, making the contract legal in one state and illegal in the other. Therefore, the parties must carefully follow all legal frameworks in which they enter into a contractual relationship.

Contracts can be governed either by common law or the Uniform Commercial Code (UCC), depending on the purpose and parties. The Uniform Commercial Code (UCC) regulates contracts related to the sale of goods. On the contrary, common law regulates contractual relationships in other cases such as employment, insurance, services, and more (Seaquist, 2012). Thus, the presented case refers to contracts for employment, therefore, being under the common law’s jurisdiction.

The non-compete agreement in the presented case requires an employee not to accept job offers for a similar position in the same metropolitan area for two years. Thus, the company prohibits a former employee from working for competitors or becoming a competitor himself (Stam, 2019). Non-compete agreements are often concluded with highly qualified specialists and are “typically included in employment contracts” (Itani, 2019, p. 76). Thus, the contract’s validity implies the agreement’s enforceability, which does not allow the employee to appeal against it in court. However, based on the elements of the contract, the agreement can be recognized as unenforceable.

The most common circumstance in which a non-compete agreement may be invalidated is insufficient consideration. From the employer’s point of view, a job offer can be considered as an adequate exchange in return for signing an agreement. However, courts often examine conditions more closely and recognize that the offering and receiving party’s power are unequal because “non-compete agreements are typically used as a condition of employment” (Reid, 2020, p. 743). Thus, if the employer only offers the employee a job without providing him with additional resources (for example, insurance or investments in his professional development), such an agreement can be recognized as unenforceable.

Another similar circumstance may serve to protect the employee’s interests if he believes that the agreement’s terms were excessively restrictive. First of all, the position occupied is essential since the employee does not have access to trade secrets or confidential information; such an agreement is unnecessary (Wendling, 2019). Another possible circumstance for appeal may be the geographical and time constraints presented (Wendling, 2019). To protect the employee, the court may find the restrictions imposed, such as the prohibition of work within the metropolitan area or two years period, to be excessive. Thus, a non-compete agreement is subject to appeal when its terms are objectively considered by the court unfair to the worker. If the imposed restrictions are reasonable and aimed at protecting the employer’s rights without violating the employee’s interests, such an agreement is considered enforceable.

References

Chen-Wishart, M. (2018). Contract Law (6th ed.). Oxford University Press.

Itani, J. (2019). The ADR loophole to restrictive non-compete agreements. Marquette Intellectual Property Review, 23(1), 75-88. Web.

Miller, R. L. (2018). Business law: Text and cases (14th ed.). Cengage Learning.

Reid, R. (2020). Should employers have the ability to enforce non-compete agreements without also offering a written employment contract? Kentucky Law Journal, 108(4), 731-747. Web.

Seaquist, G. (2012). Business law for managers. Bridgepoint Education.

Stam, E. (2019). The case against non-compete agreements. U.S.E. Research Institute Working Paper Series, 19(20), 1-19.

Wendling, L. A. (2019). Contracts for paralegals: Legal principles and practical applications (2d ed.). Wolters Kluwer.