A contract is a legally binding arrangement between two or more parties. A contract supplies particulars of what the parties agree to perform or exchange. A contract may be in written or oral form. In most circumstances, to be legally binding, a contract must be in writing and signed by all parties involved.
Courts typically demand three things for a contract to be enforceable:
- Mutual assent, or agreement to the contract terms;
- A proper offer and acceptance; and
Contracts are deemed the basis of the business world. They may be straightforward or very elaborate. Examples of contracts include employment agreements, real estate acquisition agreements, and insurance arrangements.
Contracts must be entered into by all parties willingly. All parties signing the contract must do so of their own free will and not under duress. Contracts can be used whenever parties want to document an agreement to ensure all parties’ rights are covered.
Drafting a contract refers to writing the terms and details of an agreement to specify and delineate the legal responsibilities of all parties to the contract. This permits all parties to the contract to understand their duties and legal obligations to one another clearly.
Anyone can draft a contract, but it would be in the best interest of all parties involved to have an attorney draft a contract, especially if it is complicated or elaborate. For instance, a real estate agreement often involves multiple parts, multiple parties, and intricate land descriptions. To ensure your sale or purchase, financial investment, and rights are protected, having an attorney draft this kind of agreement would be preferable.
A contract will also provide sections outlining whether or not it may be canceled and how to cancel it. The agreement will also outline the results if a party breaches the contract terms. A well-written contract will contain explicit definitions of what comprises a breach of the contract so all parties can maintain their responsibilities.
What Are the Elements of a Legally Binding Contract?
To be legally binding, a contract is required to include certain features. Some agreements must be in writing to be valid, such as arrangements for money over $500.00. A contract must be made for a legal objective. For instance, an individual cannot contract to commit a crime. It is essential to be acquainted with the requirements of a valid agreement.
A proper contract must include:
- An offer;
- An acceptance of the offer;
- A promise to perform;
- A valuable consideration;
- A date, a time window, or an event when the performance must be satisfied;
- Terms and conditions of the performance; and
Can Restriction Be Placed on the Resale of Goods?
Many manufacturers or distributors place limitations on the resale of their goods. Typically, these restrictions will be found lawful if there is a “reasonable business objective” and no “adverse effect on competition.”
Some examples of conditions that are usually upheld are:
- A requirement that the distributor sell or not sell to specific clients;
- A requirement that the distributor conduct business only in particular locations;
- A requirement that the distributor sells only at certain precise places.
These conditions will usually be a part of the distributorship agreement and will be enforced by cutting off supplies of the manufacturer’s goods or ending the distributorship contract. Since many distributorship agreements may include covenants not to compete, which may restrict the ability of the distributor to work for a competitor, this can be a powerful punishment.
What Is a Non-Compete Covenant?
A non-compete covenant, non-compete clause, or covenant not to compete is a condition that stops a former worker from working for a competitor or opening a competing business for a specified time after leaving the business.
These conditions are found in employment contracts and can guard companies’:
- Sensitive business data, customer lists, demographic info, business practices, upcoming products, marketing plans, etc.
- Confidential info, trade secrets, employment operations, etc.
- Trademarks and copyrights
- Employee investment (the cost of specialized training for workers)
Do I Need a Non-Compete Covenant?
Most courts demand a “legitimate business interest” for a non-compete covenant. The agreement must not simply penalize the worker for leaving or aim to stop regular competition. Non-compete agreements are standard in the technology and sales industries, where protecting confidential information and client relationships is critical.
What Criteria Must Be Present in a Non-Compete Covenant?
For a non-compete covenant to be enforced, the contract must be reasonable.
Several criteria should be present to make it more straightforward for courts to implement a covenant not to compete:
- Reasonable Time Restrictions: The time the worker must refrain from competing with their former employer must be reasonable. Reasonableness will differ depending on the industry. In manufacturing and marketing industries, courts have found two-year restrictions reasonable. In technology-based industries, courts have held covenants of even one year unreasonable.
- Reasonable Geographic Scope: Most non-compete covenants will be restricted to the location where the employee worked. National non-compete covenants may be deemed reasonable for industries that operate worldwide. Yet, a state that disfavors non-compete covenants, like California, may decline to implement an out-of-state covenant.
- Narrow Class of Customers and Competitors: The more specific a covenant, the more likely it will be upheld. For instance, restricting the covenant to clients with whom the worker had close contact or positions with substantially comparable duties increases the odds of the covenant being found reasonable.
- Adequate Consideration: To be reasonable, an employment contract with a non-compete clause must deliver adequate consideration for the clause term. This means the worker must obtain some form of compensation in exchange for agreeing not to compete, either via promotion or raise during employment or compensatory pay upon exit from the business.
Are There Any Restrictions That Are Not Allowed?
The most standard restriction that is not enforceable is a restriction on resale price maintenance. This limitation demands that the distributor sell the product at a minimum set price level. This condition precludes resellers from competing too fiercely and driving down yields. The Supreme Court has ruled that since this practice decreases the ability of customers to choose from sellers with independent prices, it is a violation of competition and antitrust laws.
What Is Unfair Competition?
“Unfair Competition” describes the area of antitrust and trade regulation dealing with illegal or dishonest rivalry in trade and commerce – i.e., “deceptive trade practices.” Examples include false advertising, passing off, commercial disparagement, and misappropriation.
What Is Antitrust Law?
Antitrust regulations are created to ensure free competition in the U.S. marketplace by regulating how companies conduct business. Antitrust regulation forbids practices that suppress free competition, such as monopolies, lockup agreements, certain types of mergers, and price-fixing.
What Are Some Examples of Antitrust Laws Being Violated?
Some examples of Antitrust laws that are being violated are:
- Extensive price changes of very similar product
- Suspicious statements from the seller
- Companies having low bidders on all contracts
- Having significant unexplainable dollar difference between bids
Do I Need a Lawyer?
The laws regarding distributorships can be complicated to understand. When setting up a distributorship agreement, it is essential not to create any arrangement that could be considered a direct or indirect price-fixing plan.
A business lawyer can help you create a distributorship agreement and inform you of permitted restrictions and whether they can be enforced. A lawyer can also advise you about existing agreements and regulations and represent you in court if necessary.