Employment Agreements
A covenant not to compete is an agreement in which an employee promises not to work for a
competitor for some time after leaving the company. It used to be that these covenants were rare
and reserved for top officers but they have now become commonplace throughout many
organizations. We will talk about them more in the next chapter, but oftentimes these covenants
raise an issue of consideration: What consideration does the employee receive for signing a
covenant not to compete?
Snider Bolt & Screw v. Quality Screw & Nut1
Facts: James Scott signed a covenant not to compete when he went to work for Snider Bolt & Screw.
The agreement prohibited him from taking a job with a competitor for one year after leaving Snider.
Three years later, Mr. Scott quit his job at Snider and immediately went to work for Quality Screw &
Nut (QSN).
Snider obtained a temporary restraining order that banned Scott from working at his new job. QSN
argued that the covenant not to compete was void for lack of consideration. It asked the court to lift
the temporary restraining order.
Issue: Did the covenant not to compete lack consideration?
Excerpt from Judge Heyburn’s Decision: Snider says that when Scott signed his covenant not to
compete, he did so based upon an implied promise that Snider would continue his employment. Indeed,
Snider did maintain Scott’s employment until Scott himself left his job in October, 2005. Kentucky
courts have found quite specifically that “where an employer has fulfilled an implied promise to
continue the employee’s employment, that promise is sufficient consideration [to] support enforcement
of the employee’s promise not to compete.” The Kentucky Supreme Court subsequently held that even
continued at-will employment would be sufficient consideration. Here, Scott worked for another three
years and left on his own accord to join QSN. These circumstances fit within the rule and the Court
finds that the Covenant is supported by adequate consideration.
Consequently, the Court has no basis for sustaining QSN’s motion.
Moral Consideration
Some promises should not be broken. No one wants to live in a society where donors to charity go
back on their word or promises to widows and orphans are ignored. These are commitments whose
obligation is moral, not necessarily legal, in nature. Under some circumstances, courts will uphold
agreements with “moral consideration.”
Consider a pledge to charity. If Dave promises to give $25,000 to “Save the Mexican Spotted Owl”
and then fails to make the donation, there is no consideration because he has received nothing in return.
If the nonprofit sues to enforce the promise, it cannot show that it gave anything up in return for Dave’s
promise, so there is no consideration.10
Nevertheless, some courts will force donors like Dave to make good on their pledges anyway. If,
based on Dave’s promise, the charity funded a bird-watching program or began construction on a
sanctuary, it can prove reliance. As we have seen, judges can use the doctrine of promissory estoppel to
enforce promises if there has been reliance and a great injustice would otherwise result.
1 2009 U.S. Dist. LEXIS 50797 United States District Court for the Western District of Kentucky, 2009
Other courts have dispensed with the reliance requirement, requiring promisors to pay if breaching
would simply be unjust. Especially in the case of large donations, courts will often cite the “grave
injustices” that can follow from breaking a promise. “If you don’t give ‘Save the Mexican Spotted Owl’
the $25,000 you’ve pledged, then the bird will become extinct,” a judge might say.
It is unwise to make charitable pledges, especially large pledges, unless you intend to follow
through.
Additional Case: Culbertson v. Brodsky2
Facts: Brodsky signed an option contract to buy land from Culbertson. Brodsky was to deliver a
check for $5,000, representing “earnest money,” to a bank. The bank would hold the check in escrow,
uncashed, for 60 days. Brodsky could inspect the property and perform engineering studies. If he
decided against buying, he could terminate the agreement and demand his earnest money. Ultimately,
Brodsky decided that he did want to buy the land, but Culbertson refused to sell, claiming that Brodsky
gave no consideration. The trial court ordered Culbertson to convey the land, and he appealed.
Issue: Did Brodsky give valid consideration that makes Culbertson’s promise enforceable?
Holding: Brodsky gave no consideration. His promise was illusory because he reserved an absolute
right to nullify the deal at any time, for any reason. Brodsky did not even lose the use of the money,
since the check could not be cashed unless he exercised his option. The court reversed, giving
judgment for Culbertson.
Question: What is an option contract?
Answer: In an option contract the seller grants a prospective purchaser—the option holder—the
Question: What is an “escrow?”
Answer: An escrow is an arrangement in which a trusted third-party agrees to hold money,
Question: How did the escrow work in this case?
Answer: The bank agreed to hold Brodsky’s check without cashing it for 60 days, until Brodsky
Question: Brodsky gave a $5,000 check to the bank. Why wasn’t that consideration?
Answer: In giving the check Brodsky did not incur a detriment and Culbertson did not receive a
Question: Brodsky performed tests on the land. Why weren’t the tests consideration, since they
were a detriment to him?
Answer: The bargain with Culbertson allowed Brodsky to perform such tests but did not obligate
2 788 S.W.2d 156, 1990 Tex. App. LEXIS 1008 Texas Court of Appeals, 1990
Question: Brodsky is the one who didn’t give consideration but he still wants to buy the property,
so why is Culbertson trying to get out of the deal?
Question: Is that ethical?
Exception: Modi!cation
Here are two cases with a related issue.
Case #1: Rock Singer agrees with Producer #1 that she will appear at Stadium on August 8 for one
concert, for a flat fee of $150,000. In June, Singer receives an offer of $300,000 for that same date
from Producer #2. Singer telephones Producer #1 and demands an extra $75,000. Producer #1
responds, “I don’t like it, but I’ll do it.”
Case #2: Switch Company agrees to supply 5,000 electrical switches to Engine Manufacturer with
delivery on August 8, for a total cost of $50,000. In June, Switch informs Engine that it cannot meet
the production date because the switches are more complex than Switch realized and production time is
greater. The company can deliver the goods on time only by demanding that its employees work
overtime. It requests an extra $15,000 for overtime, and Engine reluctantly agrees in writing to pay it.
Question: In each case one party modified the original agreement by promising to pay more than the
original contract required. Is the modification enforceable?
Answer: These two cases have opposite outcomes. In Case #1 Rock Singer is providing no
consideration in exchange for Producer #1’s promise to pay an additional $75,000. She has not
Comment: One cannot overemphasize the result under the common-law rule. Students will continue
to fall into the trap of believing that one party’s acquiescence to the other’s demand for additional
payment makes the demand enforceable.
Multiple Choice Questions
1. For consideration to exist, there must be:
(a) A bargained-for exchange
(b) A manifestation of mutual assent
(c) Genuineness of assent
(d) Substantially equal economic benefits to both parties
2. Which of the following requires consideration in order to be binding on the parties?
(a) Modification of a contract involving the sale of real estate
(b) Modification of a sale of goods contract under the UCC
(c) Both (a) and (b)
(d) None of the above
3. Ted’s wallet is as empty as his bank account, and he needs $3500 immediately. Fortunately, he has
three gold coins that he inherited from his grandfather. Each is worth $2500, but it is Sunday, and
the local rare coins store is closed. When approached, Ted’s neighbor Andrea agrees to buy the
first coin for $2300. Another neighbor, Cami, agrees to buy the second for $1100. A final neighbor,
Lorne, offers “all the money I have on me” – $100 – for the last coin. Desperate, Ted agrees to the
proposal. Which of the deals is supported by consideration?
(a) Ted’s agreement with Andrea, only
(b) Ted’s agreements with Andrea and Cami, only
(c) All three of the agreements
(d) None of the agreements
4. In a(n) contract, the seller guarantees to sell 100% of its output to one buyer, and the
buyer agrees to accept the entire quantity. This kind of arrangement ____________ acceptable
under the Uniform Commercial Code.
(a) output; is
(b) output; is not
(c) requirements; is
(d) requirements; is not
5. Noncompete agreements are common features of employment contracts. Currently, courts
____________ enforce these clauses.
(a) always
(b) usually
(c) rarely
(d) never
Case Questions
1. American Bakeries had a fleet of over 3,000 delivery trucks. Because of the increasing cost of
gasoline, the company was interested in converting the trucks to propane fuel. It signed a
requirements contract with Empire Gas, in which Empire would convert “approximately 3,000”
trucks to propane fuel, as American Bakeries requested, and would then sell all required propane
fuel to run the trucks. But American Bakeries changed its mind and never requested a single
conversion. Empire sued for lost profits. Who won?
Answer: Empire won over $3.2 million dollars, and the appeals court affirmed. Empire Gas Corp.
v. American Bakeries Co., 840 F.2d 1333, 1988 U.S. App. LEXIS 2482 (7th Cir. 1988). Since this
2. CeCe Hylton and Edward Meztista, partners in a small advertising firm, agreed to terminate the
business and split assets evenly. Meztista gave Hylton a two-page document showing assets,
liabilities, and a bottom line of $35,235.67, with one half due to each partner. Hylton questioned the
accounting, and asked to see the books. Meztista did not permit Hylton to see any records, and
refused to answer her phone calls. Instead, he gave her a check in the amount of $17,617.83, on
which he wrote “Final payment/payment in full.” Hylton cashed the check, but wrote on it, “Under
protest—cashing this check does not constitute my acceptance of this amount as payment in full.”
Hylton then filed suit, demanding additional monies. Meztista claimed that the parties had made an
accord and satisfaction. What is the best argument for each party? Who should win?
Answer: Hylton argued that in denying her access to the books, Meztista had not shown the good
faith required to support accord and satisfaction. Meztista argued that the good faith requirement
3. ETHICS Melnick built a house for Gintzler, but the foundation was defective. Gintzler agreed to
accept the foundation if Melnick guaranteed to make future repairs caused by the defects. Melnick
agreed but later refused to make any repairs. Melnick argued that his promise to make future
repairs was unsupported by consideration. Who will win the suit? Is either party acting
unethically? Which one, and why?
Answer: Gintzler should, and did. The consideration to support Melnick’s promise of repairs was
4. Sami walks into a restaurant. She is given a menu, which indicates that lobster is $30. Sami orders
the lobster. It arrives, and Sami thinks it is very tasty. When the bill arrives, Sami tries to execute
a clever ploy she learned about in her business law class. She writes a check to the restaurant for
$20, and writes “full settlement” across the top. The waiter accepts the check without looking at it,
and the restaurant manager later deposits it in the restaurant’s bank account. Is this a liquidated or
an unliquidated debt? Is Sami off the hook for the last $10?
Answer: It is a liquidated debt because there is no reasonable dispute as to the amount of the debt.
5. In the bleachers…
“You’re a prince, George!” Mike exclaimed. “Who else would give me a ticket to the big game?”
“No one, Mike, no one.”
“Let me offer my thanks. I’ll buy you a beer!”
“Ah,” George said. “A large beer would hit the spot right now.”
“Small. Let me buy you a small beer.”
“Ah, well, good enough.”
Mike stood and took his wallet from his pocket. He was distressed to find a very small number of
bills inside. “There’s bad news, George!” he said.
“What’s that?”
“I, ah, I can’t buy you the beer, George.”
George considered that for a moment. “I’ll tell you what, Mike,” he said. “If you march to the
concession stand right this minute and get me my beer, I won’t punch you in the face.”
“It’s a deal!” Mike said.
Discuss the consideration issues raised by this exchange.
Answer: Mike’s initial promise to buy the beer is a gratuitous promise. He did receive a ticket
from George, but the ticket was not given to induce Mike to promise to buy the beer.
6. Jack Tallas came to the United States from Greece in 1914. He lived in Salt Lake City for nearly 70
years, achieving great success in insurance and real estate. During the last 14 years of his life, his
friend Peter Dementas helped him with numerous personal and business chores. Two months before
his death, Tallas dictated a memorandum to Dementas, in Greek, stating:
PETER K. DEMENTAS, is my best friend I have in this country and since he came to the United
States he treats me like a father and I think of him as my own son. He takes me in his car grocery
shopping. He drives me to the doctor and also takes me every week to Bingham to pick up my mail,
collect the rents and manage my properties. For all the services Peter has given me all these years, I
owe to him the amount of $50,000 (Fifty Thousand Dollars.) I will shortly change my will to include
him as my heir.
Tallas signed the memorandum, but he did not in fact alter his will to include Dementas. The estate
refused to pay, and Dementas sued. Was there consideration? Please rule.
Discussion Questions
Apply the following material to the next five questions:
Some view consideration as a technicality that allows people to make promises and then back out
of them. Perhaps all promises should be enforced. In Japan, for example, promises to give gifts are
enforceable without consideration.3
In the United States, if I promise to give you a gift merely because I feel like being nice, I can
freely change my mind as far as contract law is concerned. A court will not make me follow
through, because there is no consideration.
In Japan, I would be obligated to buy the gift if all other elements of a contract were present – an
offer and acceptance, and so forth.
3 See Japan’s Civil Code, Article 549.
1. When it comes to giving gifts, which is better — the Japanese or American rule?
2. Are there any specific types of agreements (perhaps high value, long term, extremely time
consuming) that should definitely require consideration?
1. Albert and Luis, lifelong friends, had a tradition. Every Friday, they took turns going to the
corner store and buying what they called a “package”—some vodka and a lottery ticket. One
4.
The consideration doctrine is controversial. Critics argue that it is a remnant of a bygone era,
lacking any reasonable modern purpose and that it undermines the purpose of contract law,
which is to enforce the intention of the parties to an agreement. Should consideration be
abolished?
5. Amber Williams and Frederick Ormsby were lovers, embroiled in a turbulent romantic relationship.
After knowing each other for a short time, Frederick moved into Amber’s house and paid off her
$310,000 mortgage. She then gave him title to the house. But their happiness was not to last. The
couple canceled their plans to marry and Amber moved out of the house. Two months later,
Frederick sought reconciliation. Amber refused to get back together unless Frederick gave her half
ownership of the house. Frederick agreed. After the couple split up for the last time, Amber sued
for her half of the house. Frederick argued that his promise was not supported by adequate