Business legal and ethical environment

QUESTION 10

The new contract terms agreed upon over the telephone between the president and Carol are likely not valid and Carol likely cannot enforce these new terms. The company is likely not obligated to comply with the new terms.

Explanation:

The original employment contract contains a clause requiring that any modification of the contract must be in writing. This type of clause is known as a “no oral modification” clause or a “written modification required” clause.

• Enforceability of No Oral Modification Clauses: Generally, courts will uphold and enforce no oral modification clauses. The reasoning behind this is to:

  • Prevent fraudulent claims: It reduces the risk of parties falsely claiming that the contract was modified verbally.
  • Provide certainty and stability to contractual relationships: It ensures that important changes are documented and agreed upon formally.
  • Reflect the original intent of the parties: By including such a clause, the parties initially agreed that written documentation would be necessary for any changes.

• Oral Modifications and the Parol Evidence Rule: Even without a specific no oral modification clause, the parol evidence rule often prevents the introduction of prior or contemporaneous oral agreements that contradict a fully integrated written contract. While a subsequent oral agreement could theoretically modify a contract, the presence of a no oral modification clause strengthens the argument against the validity of such oral changes.

• Exceptions (Less Likely in This Scenario): There are limited exceptions where courts might enforce an oral modification despite a no oral modification clause, such as:

  • Waiver: If one party has consistently acted in a way that suggests they are disregarding the no oral modification clause, and the other party has relied on this conduct to their detriment, a court might find that the clause has been waived. However, a single instance of oral agreement is unlikely to constitute a waiver.
  • Subsequent Written Confirmation: If the oral agreement was followed by some form of written confirmation, even if not a formal amendment, a court might consider it.

In Carol’s case: The existence of the written modification requirement in her contract strongly suggests that the oral agreement for her new role as vice-president of marketing is not legally binding. The changes in salary, vacation, sick leave, membership, and office space are all material terms of the employment contract. Because these modifications were not made in writing as explicitly required by the contract, they are likely invalid.

Therefore, if a dispute arises, the company could likely argue that the original terms of Carol’s sales manager contract still govern the remaining three years of her employment. Carol would likely have difficulty enforcing the new, orally agreed-upon terms. The company would likely be obligated to comply with the terms of the original written contract.

QUESTION 11

The clause in the contract to purchase the store stating that Mel will not open another grocery store within a 150-mile radius of the old store for a period of at least ten years is a covenant not to compete (also known as a restrictive covenant).

The validity of this clause is likely to be challenged and potentially deemed unreasonable and therefore invalid, as currently written.

Reasons for Potential Invalidity:

Courts generally disfavor covenants not to compete because they restrain trade and limit a person’s ability to earn a living. While they are often upheld in the context of the sale of a business (to protect the goodwill the buyer is purchasing), they must be reasonable in scope, geographic area, and duration.

• Scope (Type of Activity): The scope (not opening “another grocery store”) is likely reasonable as it directly relates to the business being sold.
• Geographic Area (150-mile radius): A 150-mile radius is likely to be considered unreasonably broad for a neighborhood grocery store. The goodwill of a local grocery store typically extends to a much smaller geographic area, usually the immediate neighborhood and surrounding communities. A 150-mile radius could prevent Mel from opening a store in completely separate and unrelated markets where his previous goodwill would have little to no impact on Katrina’s business.
• Duration (Ten years): A period of ten years is also likely to be considered unreasonably long for a neighborhood grocery store. The market and customer base can change significantly over such a long period, and preventing Mel from re-entering the grocery business in his general area for a decade could be seen as unduly restrictive.

If the clause is not valid, does it make the entire contract invalid?

Generally, no, an unreasonable covenant not to compete will typically be severed (removed) from the rest of the contract. The remaining terms of the sales agreement for the grocery store would likely still be valid and enforceable. Courts prefer to uphold contracts where possible and will usually invalidate only the unreasonable portion, especially if there is a severability clause in the agreement (though even without one, severance is often the remedy).

How could you re-write the clause to make it valid?

To increase the likelihood of the covenant not to compete being valid, it should be made more reasonable in terms of geographic scope and duration. Here’s a possible revision:

“Mel agrees that for a period of three (3) years following the closing of the sale, he will not, directly or indirectly, own, operate, manage, or have any significant financial interest in any grocery store that is located within a five (5) mile radius of the premises located at [Address of the old grocery store].”

Reasons for the Revision:

• Reduced Duration (Three Years): This is a more common and often considered reasonable timeframe to allow Katrina to establish herself and benefit from the goodwill she purchased.
• Reduced Geographic Area (Five-Mile Radius): This radius is more likely to be seen as directly connected to the customer base and goodwill of a neighborhood grocery store. It prevents Mel from immediately opening a competing store in the same local market while still allowing him to pursue opportunities in more distant areas.
• More Specific Language: The revised clause also includes more specific language about the nature of the restriction (owning, operating, managing, significant financial interest) to avoid ambiguity.

It’s important to note that the specific reasonableness of a covenant not to compete can depend on the specific facts and the laws of the relevant jurisdiction. Consulting with legal counsel is always recommended when drafting or evaluating such clauses.

QUESTION 12

Cheryl, being a 17-year-old, is considered a minor under the law in most jurisdictions (the age of majority is typically 18). Minors generally have the right to disaffirm (cancel) contracts they enter into, with some exceptions.

Cheryl’s Rights:

• Right to Disaffirm: Cheryl has the right to disaffirm the contract for the purchase of the designer outfit and the fur coat. This right stems from the legal principle that minors lack the full capacity to enter into binding contracts, intended to protect them from their own immaturity and potential exploitation.
• Return of Goods: To disaffirm the contract, Cheryl must return the fur coat (and ideally the designer outfit, although the question focuses on the coat) to the department store.
• Recovery of Consideration: Upon disaffirming the contract and returning the goods (if possible and in reasonable condition), Cheryl is entitled to the return of the consideration she paid, which is $5000.

The Store’s Obligations:

• Obligation to Accept Return: The department store is generally obligated to accept the return of the fur coat (and potentially the outfit) when Cheryl, as a minor, chooses to disaffirm the contract.
• Obligation to Refund: The store is obligated to refund Cheryl the $5000 she paid for the coat. The fact that Cheryl bought the items for an important interview does not negate her right to disaffirm. The law focuses on the age of the contracting party, not their reasons for entering into the contract.
• Condition of Goods: The store may have grounds to refuse a full refund if the returned goods are significantly damaged due to Cheryl’s negligence beyond normal wear and tear. However, the question does not suggest this is the case. The store’s “reluctance” is likely based on their general business interest in not having merchandise returned, not necessarily on a legal basis to refuse in this situation.

Explanation:

The legal doctrine of infancy doctrine (or minority doctrine) allows minors to disaffirm most contracts they have entered into. This right exists to protect minors from being bound by agreements that may not be in their best interest due to their lack of experience and judgment.

• Time of Disaffirmance: A minor can typically disaffirm a contract at any time while they are still a minor and for a reasonable period after reaching the age of majority.
• Exceptions (Not Applicable Here): There are some exceptions to the right to disaffirm, such as contracts for necessities (like food, shelter, and essential medical care). Designer clothing and a fur coat are generally not considered necessities.
• Duty to Restore: When disaffirming a contract, the minor generally has a duty to return any property they received under the contract, provided they still possess it. Even if the minor has used the item, they can usually still disaffirm and are often only required to return the item in its current condition.

Therefore, Cheryl has the right to return the fur coat and demand her $5000 back, and the department store is legally obligated to accept the return and provide the refund. Their reluctance does not override Cheryl’s legal rights as a minor.

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