Business Finance
CPC E Contracts Preexisting Duty & Rules of Interpretation Discussion

Central Pennsylvania College

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I’m studying for my Business Law class and need an explanation.

There are questions under each case (total 12 questions)

150 words or so for each case.

So total 450-500 words for 3 cases.

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Section 4 International Treaties Affecting E-Contracts Today, much of the e-commerce conducted on a worldwide basis involves buyers and sellers from the United States. The preeminence of U.S. law in this area is likely to be challenged in the future, however, as Internet use continues to expand worldwide. Already, several international organizations have created their own regulations for global Internet transactions. The United Nations Convention on the Use of Electronic Communications in International Contracts improves commercial certainty by determining an Internet user’s location for legal purposes. The convention also establishes standards for creating functional equivalence between electronic communications and paper documents. The convention also provides that e-signatures will be treated as the equivalent of signatures on paper documents. Another treaty relevant to e-contracts is the Hague Convention on the Choice of Court Agreements. Although it does not specifically mention e-commerce, this convention provides more certainty regarding jurisdiction and recognition of judgments by other nations ’courts, thereby facilitating both offline and online transactions. Reviewing: Agreement in Traditional and E-Contracts Shane Durbin wanted to have a recording studio custom-built in his home. He sent invitations to a number of local contractors to submit bids on the project. Rory Amstel submitted the lowest bid, which was $20,000 less than any of the other bids Durbin received. Durbin called Amstel to ascertain the type and quality of the materials that were included in the bid and to find out if he could substitute a superior brand of acoustic tiles for the same bid price. Amstel said he would have to check into the price difference. The parties also discussed a possible start date for construction. Two weeks later, Durbin changed his mind and decided not to go forward with his plan to build a recording studio. Amstel filed a suit against Durbin for breach of contract. Using the information presented in the chapter, answer the following questions. 1. Did Amstel’s bid meet the requirements of an offer? Explain. 2. Was there an acceptance of the offer? Why or why not? 3. Suppose that the court determines that the parties did not reach an agreement. Further suppose that Amstel, in anticipation of building Durbin’s studio, had purchased materials and refused other jobs so that he would have time in his schedule for Durbin’s project. Under what theory discussed in the chapter might Amstel attempt to recover these costs? 4. How is an offer terminated? Assuming that Durbin did not inform Amstel that he was rejecting the offer, was the offer terminated at any time described here? Explain. DEBATE THIS... The terms and conditions in click-on agreements are so long and detailed that no one ever reads the agreements. Therefore, the act of clicking on “I agree” is not really an acceptance. Preexisting Duty Under most circumstances, a promise to do what one already has a legal duty to do does not constitute legally sufficient consideration. The preexisting legal duty may be imposed by law or may arise out of a previous contract. A sheriff, for instance, has a duty to investigate crime and to arrest criminals. Hence, a sheriff cannot collect a reward for providing information leading to the capture of a criminal. Likewise, if a party is already bound by contract to perform a certain duty, that duty cannot serve as consideration for a second contract. Example 13.3 Ajax Contractors begins construction on a seven-story office building and after three months demands an extra $75,000 on its contract. If the extra $75,000 is not paid, the contractor will stop working. The owner of the land, finding no one else to complete the construction, agrees to pay the extra $75,000. The agreement is unenforceable because it is not supported by legally sufficient consideration. Ajax Contractors had a preexisting contractual duty to complete the building. Unforeseen Difficulties The rule regarding preexisting duty is meant to prevent extortion and the so-called holdup game. Nonetheless, if, during performance of a contract, extraordinary difficulties arise that were totally unforeseen at the time the contract was formed, a court may allow an exception to the rule. The key is whether the court finds the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made. Suppose that in Example 13.3, Ajax Contractors had asked for the extra $75,000 because it encountered a rock formation that no one knew existed. If the landowner agrees to pay the extra $75,000 to excavate the rock and the court finds that it is fair to do so, Ajax Contractors can enforce the agreement. If rock formations are common in the area, however, the court may determine that the contractor should have known of the risk. In that situation, the court may choose to apply the preexisting duty rule and prevent Ajax Contractors from obtaining the extra $75,000. Rescission and New Contract The law recognizes that two parties can mutually agree to rescind, or cancel, their contract, at least to the extent that it is executory (still to be carried out). Rescission ((pronounced rih-sih-zhen) A remedy whereby a contract is canceled and the parties are returned to the positions they occupied before the contract was made; may be effected through the mutual consent of the parties, by their conduct, or by court decree.) is the unmaking of a contract so as to return the parties to the positions they occupied before the contract was made. Sometimes, parties rescind a contract and make a new contract at the same time. When this occurs, it is often difficult to determine whether there was consideration for the new contract, or whether the parties had a preexisting duty under the previous contract. If a court finds there was a preexisting duty, then the new contract will be invalid because there was no consideration. Past Consideration Promises made in return for actions or events that have already taken place are unenforceable. These promises lack consideration in that the element of bargainedfor exchange is missing. In short, you can bargain for something to take place now or in the future but not for something that has already taken place. Therefore, past consideration (Something given or some act done in the past, which cannot ordinarily be consideration for a later bargain.) is no consideration. Case in Point 13.4 Jamil Blackmon became friends with Allen Iverson when Iverson was a high school student who showed tremendous promise as an athlete. One evening, Blackmon suggested that Iverson use “The Answer” as a nickname in the summer league basketball tournaments. Blackmon said that Iverson would be “The Answer” to all of the National Basketball Association’s woes. Later that night, Iverson said that he would give Blackmon 25 percent of any proceeds from the merchandising of products that used “The Answer” as a logo or a slogan. Because Iverson’s promise was made in return for past consideration, it was unenforceable. In effect, Iverson stated his intention to give Blackmon a gift. In a variety of situations, an employer will often ask an employee to sign a noncompete agreement, also called a covenant not to compete. Under such an agreement, the employee agrees not to compete with the employer for a certain period of time after the employment relationship ends. When a current employee is required to sign a noncompete agreement, his or her employment is not sufficient consideration for the agreement because the individual is already employed. To be valid, the agreement requires new consideration. In the following case, the court had to decide if new consideration supported a noncompete agreement between physicians and a medical clinic. Case Analysis Case 13.2 Baugh v. Columbia Heart Clinic, P.A. Court of Appeals of South Carolina, 402 S.C. 1, 738, S.E.2d 480 (2013). IN THE LANGUAGE OF THE COURT THOMAS, J. [Judge] *** * Columbia Heart [Clinic, P.A., in Columbia, South Carolina] is a corporate medical practice that provides comprehensive cardiology services. Its physicians are all cardiologists. J. Kevin Baugh, M.D., and Barry J. Feldman, M.D., * * * are cardiologists who had been shareholders and employees of Columbia Heart since before 2000. *** * When [Baugh and Feldman] became shareholders, they each entered employment agreements that forfeited money payable to them upon termination if they competed with Columbia Heart in Lexington and Richland Counties within a year. These agreements contained no other provisions that discouraged competition, and their consideration was a compensation system. In 2004, Columbia Heart’s shareholders embarked on the construction of a new medical office building in Lexington County through a limited liability company (the LLC). The LLC was almost entirely owned by the shareholder-physicians of Columbia Heart. * * * Each member of the LLC signed personal obligations on the project debt in proportion to their equity [ownership share] in the LLC. Because of (1) the investment and liabilities undertaken by Columbia Heart’s shareholders as members of the LLC and (2) a recent departure of a large number of Columbia Heart physicians, Columbia Heart sought to bind its shareholderphysicians more tightly to the medical practice. Thus, in July 2004 Columbia Heart’s shareholderphysicians entered into * * * [noncompete] agreements. *** * * * * Article 5 [of the agreements] says the following: Physician, in the event of termination * * * for any reason, during the twelve (12) month period immediately following the date of termination * * * shall not Compete * * * with Columbia Heart. Section 5.2 defines specific terms “for purposes of Article 5”: “Compete” means directly or indirectly, on his own behalf or on behalf of any other Person, other than at the direction of Columbia Heart and on behalf of Columbia Heart: 1. organizing or owning any interest in a business which engages in the Business in the Territory; 2. engaging in the Business in the Territory; and 3. assisting any Person (as director, officer, employee, agent, consultant, lender, lessor or otherwise) to engage in the Business in the Territory. “Business” is defined as “the practice of medicine in the field of cardiology.” “Territory” is defined as “the area within a twenty (20) mile radius of any Columbia Heart office at which Physician routinely provided services during the year prior to the date of termination.” No separate monetary consideration was paid to any shareholderphysician to sign the Agreements, nor did the Agreements change the [established] compensation system. *** * Columbia Heart opened a new office in the LLC’s building in December 2005. In April 2006, [Baugh and Feldman] left Columbia Heart. Within a month after departing, [Baugh and Feldman] opened a new practice, Lexington Heart Clinic, where they treated patients in cardiology and hired a number of Columbia Heart’s administrative and medical support staff. Lexington Heart was on the same campus as Columbia Heart’s Lexington office, separated by an approximate distance of 300 yards. Columbia Heart’s * * * office closed in September 2006 because of fiscal unsustainability. [Baugh and Feldman] filed suit against Columbia Heart [in a South Carolina state court] * * * seeking * * * a ruling that the Agreements contain unenforceable non- competition provisions. The trial court * * * held the Agreements’ non-competition provisions unenforceable * * * . This appeal followed. *** * [Baugh and Feldman] contend * * * that the Agreements are unenforceable because they are not supported by new consideration. We disagree. When a covenant not to compete is entered into after the inception of employment, separate consideration, in addition to continued * * * employment, is necessary in order for the covenant to be enforceable. There is no consideration when the contract containing the covenant is exacted after several years’ employment and the employee’s duties and position are left unchanged. [Emphasis added.] [Baugh and Feldman] executed the Agreements after they became employed by Columbia Heart, and the Agreements did not change the general compensation system agreed to by the parties under their prior employment contracts. However, * * * Article 4 of the Agreements provides the following: Physician shall be paid Five Thousand and No/100 Dollars ($5,000.00) per month for each of the twelve (12) months following termination, so long as the Physician is not in violation of Article 5 of this Agreement. This language established that Columbia Heart promised to pay [Baugh and Feldman] each * * * a total of $60,000 over twelve months after termination so long as they did not violate the non-competition provision in Article 5. * * * Consequently, the Agreements are supported by new consideration. *** * We reverse the trial court’s finding that the non-competition provisions in Article 5 and Article 4 are unenforceable. Legal Reasoning Questions 1. What is consideration? 2. When a noncompete agreement is entered into before employment, would additional compensation (beyond the basic salary for the position) constitute sufficient consideration for the agreement? Why or why not? 3. When a noncompete agreement is entered into after employment has begun, would continued employment constitute sufficient consideration for the agreement? Explain. 4. In this case, did the court hold that the noncompete agreement at the heart of the dispute was supported by consideration? Why or why not? Other Rules of Interpretation Generally, a court will interpret the language to give effect to the parties ’intent as expressed in their contract. This is the primary purpose of the rules of interpretation—to determine the parties ’intent from the language used in their agreement and to give effect to that intent. A court normally will not make or remake a contract, nor will it interpret the language according to what the parties claim their intent was when they made it. Rules the Courts Use The courts use the following rules in interpreting contractual terms: 1. As far as possible, a reasonable, lawful, and effective meaning will be given to all of a contract’s terms. 2. A contract will be interpreted as a whole. Individual, specific clauses will be considered subordinate to the contract’s general intent. All writings that are a part of the same transaction will be interpreted together. 3. Terms that were the subject of separate negotiation will be given greater consideration than standardized terms and terms that were not negotiated separately. 4. A word will be given its ordinary, commonly accepted meaning, and a technical word or term will be given its technical meaning, unless the parties clearly intended something else. 5. Specific and exact wording will be given greater consideration than general language. 6. Written or typewritten terms will prevail over preprinted ones. 7. Because a contract should be drafted in clear and unambiguous language, a party who uses ambiguous expressions is held to be responsible for the ambiguities. Thus, when the language has more than one meaning, it will be interpreted against the party who drafted the contract. 8. Evidence of usage of trade, course of dealing, and course of performance may be admitted to clarify the meaning of an ambiguously worded contract. (These terms will be defined and discussed in more detail in Chapter 20.) Express Terms Usually Given the Most Weight Express terms (terms expressly stated in the contract) are given the greatest weight, followed by course of performance, course of dealing, and custom and usage of trade— in that order. When considering custom and usage, a court will look at the trade customs and usage common to the particular business or industry and to the locale in which the contract was made or is to be performed. Case in Point 11.10 Jessica Robbins bought a house in Tennessee. U.S. Bank financed the purchase, and Tennessee Farmers Mutual Insurance Company issued the homeowner’s insurance policy. The policy included a clause that promised payment to the bank unless the house was lost due to an “increase in hazard” that the bank knew about but did not tell the insurer. When Robbins fell behind on her mortgage payments, the bank started foreclosure proceedings. No one told the insurer. Robbins filed for bankruptcy, which postponed foreclosure. Meanwhile, the house was destroyed in a fire. The bank filed a claim under the policy, but the insurer refused to pay because it had not been told by the bank of an “increase in hazard”—the foreclosure. The bank then filed a lawsuit. The court found that the plain meaning of the words “increase in hazard” in the policy referred to physical conditions on the property that posed a risk, not to events such as foreclosure. Thus, the bank was not required to notify the insurer under the terms of the policy, and the lack of notice did not invalidate the coverage. Reviewing: Nature and Terminology Mitsui Bank hired Ross Duncan as a branch manager in one of its Southern California locations. At that time, Duncan received an employee handbook informing him that Mitsui would review his performance and salary level annually. In 2012, Mitsui decided to create a new lending program to help financially troubled businesses stay afloat. It hired Duncan to be the credit development officer (CDO) and gave him a written compensation plan. Duncan’s compensation was to be based on the program’s success and involved a bonus and commissions based on the volume of new loans and sales. The written plan also stated, “This compensation plan will be reviewed and potentially amended after one year and will be subject to such review and amendment annually thereafter.” Duncan’s efforts as CDO were successful, and the business-lending program he developed grew to represent 25 percent of Mitsui’s business in 2013 and 40 percent in 2014. Nevertheless, Mitsui refused to give Duncan a raise in 2013. Mitsui also amended his compensation plan to significantly reduce his compensation and to change his performance evaluation schedule to every six months. When he had still not received a raise by 2014, Duncan resigned as CDO and filed a lawsuit alleging breach of contract. Using the information presented in the chapter, answer the following questions. 1. What are the four requirements of a valid contract? 2. Did Duncan have a valid contract with Mitsui for employment as CDO? If so, was it a bilateral or a unilateral contract? 3. What are the requirements of an implied contract? 4. Can Duncan establish an implied contract based on the employment manual or the written compensation plan? Why or why not? ...
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Preexisting Duty
Under most circumstances, a promise to do what one already has a legal duty to do
does not constitute legally sufficient consideration. The preexisting legal duty may be
imposed by law or may arise out of a previous contract. A sheriff, for instance, has a
duty to investigate crime and to arrest criminals. Hence, a sheriff cannot collect a
reward for providing information leading to the capture of a criminal.
Likewise, if a party is already bound by contract to perform a certain duty, that duty
cannot serve as consideration for a second contract.
Example 13.3
Ajax Contractors begins construction on a seven-story office building and after three
months demands an extra $75,000 on its contract. If the extra $75,000 is not paid, the
contractor will stop working. The owner of the land, finding no one else to complete the
construction, agrees to pay the extra $75,000. The agreement is unenforceable
because it is not supported by legally sufficient consideration. Ajax Contractors had a
preexisting contractual duty to complete the building.
Unforeseen Difficulties
The rule regarding preexisting duty is meant to prevent extortion and the so-called
holdup game. Nonetheless, if, during performance of a contract, extraordinary
difficulties arise that were totally unforeseen at the time the contract was formed, a court
may allow an exception to the rule. The key is whether the court finds the modification is
fair and equitable in view of circumstances not anticipated by the parties when the
contract was made.
Suppose that in Example 13.3, Ajax Contractors had asked for the extra $75,000
because it encountered a rock formation that no one knew existed. If the landowner
agrees to pay the extra $75,000 to excavate the rock and the court finds that it is fair to
do so, Ajax Contractors can enforce the agreement. If rock formations are common in
the area, however, the court may determine that the contractor should have known of
the risk. In that situation, the court may choose to apply the preexisting duty rule and
prevent Ajax Contractors from obtaining the extra $75,000.
Rescission and New Contract

The law recognizes that two parties can mutually agree to rescind, or cancel, their
contract, at least to the extent that it is executory (still to be carried out). Rescission
((pronounced rih-sih-zhen) A remedy whereby a contract is canceled and the parties are
returned to the positions they occupied before the contract was made; may be effected
through the mutual consent of the parties, by their conduct, or by court decree.) is the
unmaking of a contract so as to return the parties to the positions they occupied before
the contract was made.
Sometimes, parties rescind a contract and make a new contract at the same time.
When this occurs, it is often difficult to determine whether there was consideration for
the new contract, or whether the parties had a preexisting duty under the previous
contract. If a court finds there was a preexisting duty, then the new contract will be
invalid because there was no consideration.
Past Consideration
Promises made in return for actions or events that have already taken place are
unenforceable. These promises lack consideration in that the element of bargainedfor
exchange is missing. In short, you can bargain for something to take place now or in the
future but not for something that has already taken place. Therefore, past
consideration (Something given or some act done in the past, which cannot ordinarily
be consideration for a later bargain.) is no consideration.

Case in Point 13.4
Jamil Blackmon became friends with Allen Iverson when Iverson was a high school
student who showed tremendous promise as an athlete. One evening, Blackmon
suggested that Iverson use “The Answer” as a nickname in the summer league
basketball tournaments. Blackmon said that Iverson would be “The Answer” to all of the
National Basketball Association’s woes. Later that night, Iverson said that he would give
Blackmon 25 percent of any proceeds from the merchandising of products that used
“The Answer” as a logo or a slogan. Because Iverson’s promise was made in return for
past consideration, it was unenforceable. In effect, Iverson stated his intention to give
Blackmon a gift.
In a variety of situations, an employer will often ask an employee to sign a noncompete
agreement, also called a covenant not to compete. Under such an agreement, the
employee agrees not to compete with the employer for a certain period of time after the
employment relationship ends. When a current employee is required to sign a

noncompete agreement, his or her employment is not sufficient consideration for the
agreement because the individual is already employed. To be valid, the agreement
requires new consideration.
In the following case, the court had to decide if new consideration supported a
noncompete agreement between physicians and a medical clinic.
Ca...

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