Contract Law-Illegal Contracts Contracts are either totally

1
Contract Law-Illegal Contracts

• Contracts are either totally or partially
  unenforceable if the contract as a whole or some
  part of the contract either . . .
• Violates a state or federal statute
• E.g., agreements for services and fee by someone
  whos supposed to have a license
  doesntwhether she can collect fee depends on
  type of license requirement.
• Violates public policy as established by judicial
  precedent
• E.g., (1) Gambling contractswhether or not its
  criminal gambling (2) covenants not to compete
  (3) exculpatory clauses
• Note this this chapter includes unconscionable
  contracts, which dont belong in a list of
  illegal contracts (my coauthor did it to keep
  Chp. 15 from being so much longer than Chp. 14).

2
Illegal Contracts, cont.

• Ryno v. Tyra, TX Ct. of App., 1988
• Ryno owned Bavarian Motors, an automobile
  dealership in Fort Worth. Tyra was car shopping
  and really liked a BMW at Rynos dealership. The
  price of the car was 125,000. Ryno, the dealer,
  then proposed that they flip a coinRyno said
  double or nothing? Tyra, the customer, agreed.
  They flipped a coin, and Tyra won. Ryno gave
  him the keys and the German certificate of title
  (which the TX Dept. of Motor Vehicles would
  accept as proof of title). Later, Ryno sold the
  dealership and still later the new owner of the
  dealership asked Tyra if he would lend the car to
  the dealership simply to put it on display for a
  short time. Tyra agreed, and while the car was
  there, Ryno came back and took it. Tyra sued
  Ryno for the tort of conversion.
• Was this an illegal gambling contract?
• Courts conclusion rationale?

3
Contract Law-Illegal Contracts

• Covenants Not to Compete (other names)
• General Rules
• Ancillary
• Employer has legitimate business interest needing
  protection, such as . . .
• Reasonablearea, time, customersmust not limit
  competition more than necessary to . . . .
• Blue-pencil rule
• Outlier states
• CA
• TX

4
Covenants not to compete (CNTC), cont.

• Prof. Bus. Serv. v. Rosno, p. 337
• Facts
• How was this different from a general CNTC? Did
  it limit competition more or less than a more
  general one?
• Courts conclusion rationalewhat did the court
  actually do here, and why?
• Could you tell from reading this case whether
  this was in a state where courts use the
  blue-pencil rule?

5
CNTC, cont.

• Isuani v. Manske-Sheffield Radiology, TX Ct. App,
  1991
• Dr. Isuani was a physician practicing radiology
  with a group of other radiologists (MSR). They
  were all employees of the corporate entity, and
  had enforceable contracts that were renewed
  annually. As part of his employment contract, who
  was not an employee-at-will, Isuani signed the
  following CNTC
• Upon the termination of this Contract, Employee
  will not engage in the practice of medicine in
  Employee's own name or in association with
  others, or offer Employee's services as a
  consultant, employee, independent contractor or
  otherwise, whether directly or indirectly, within
  the area having a radius of fifteen miles from
  St. Mary's Hospital, Port Arthur, Texas, for a
  period of one year from the termination or
  expiration of this Contract. The CNTC was
  there to protect MSRs interests in being able to
  take referrals from physicians (thats how
  radiologists get their business) and to perform
  MSRs contracts with 2 hospitals.
• Isuani did not renew his employment contract when
  it expired terminated his employment contract
  with MSR in a way permitted by the contract
  (i.e., he didnt breach the basic contract), and
  immediately went to work for another radiology
  group within 15 miles. One of the main issues
  was that Isuani practiced several subspecialties
  that the other MSR doctors werent qualified to
  perform. MSR sued Isuani.
• Courts conclusion and rationale.

6
CNTC, cont.

• Mutual Loan Co. v. Pierce, Iowa Sup. Ct.
• Pierce worked as a manager-trainee for the
  employer, a loan company, in Sioux City, IA.
  Their contract provided that the employee would
  not work in the small-loan business in the same
  town for one year after leaving the employer. The
  employee accepted a position with a competitor as
  a delinquent account collector shortly after the
  employer discharged him.
• The evidence showed that Pierce had not developed
  any significant relationships with the employers
  customers while he had worked there, and he had
  no knowledge of any of the employers trade
  secrets.
• Time ok?
• Area ok?
• Courts conclusion rationale?

7
CNTC, cont.

• Steamatic of Kansas City v. Rhea, Mo. Ct. App.,
  1988
• Steamatic is in the business of providing general
  cleaning services and specialty services for
  disaster restoration. Where the contents of
  premises are damaged by fire, smoke or exposure
  to water and the elements, Steamatic cleans and
  refurbishes the carpets, drapes, furniture,
  machines and other items  affected by the
  casualty. In most, if not all cases, Steamatic
  obtains the business by soliciting the owner of
  the damaged goods and describing the services
  available. Although insurance may be involved, it
  is the owner of the property who decides whether
  to employ Steamatic. Steamatic also maintains
  good relations with insurance adjusters in the
  hope that they will recommend Steamatic to
  property owners. Obviously, Steamatic did not
  depend on repeat business from customers.
• Rhea was employed by Steamatic as a marketing
  representative. His duties included customer
  solicitation, preparation of cost estimates,
  supervision of restoration work and the conduct
  of informational seminars. When he was hired, he
  signed a confidentiality agreement and a CNTC
  that prohibited him from working in a competing
  business within the 6-county KC metropolitan area
  for 2 years after termination of the employment
  for any reason. Rhea left and soon went to work
  for a competitor in the area. Steamatic sued to
  enforce the CNTC.

8
Illegal ContractsExculpatory Clauses

• A clause in a contract seeking to excuse one
  party from liability for . . . .
• Sometimes enforceable to bar a later lawsuit by
  the other party, and sometimes not enforceable.
• When are they enforceable thus prevent a future
  lawsuit?
• (1)
• (2)
• (3)
• When enforceable, can only excuse liability for
  what?
• What is one common situation in which these
  clauses are often enforced?

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Exculpatory Clauses, cont.

• Seigneur v. Natl Fitness Inst. (NFI), p. 339
• Facts
• How did these facts stack up against the
  requirements that must be met for an exculpatory
  clause to be enforceable?
• Courts conclusion rationale?
• What was the practical result of this conclusion?

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Exculpatory Clauses, cont.

• Allright, Inc. v. Schroeder, TX Ct. of App., 1977
• Schroeder drove his automobile into defendant's
  parking lot in downtown Houston. He turned
  possession of the automobile over to one of the
  defendant's employees, who proceeded to park the
  automobile keep the keys. Schroeder received a
  claim ticket. The words "We close at 6 o'clock
  p.m." were printed on the ticket in large bold
  type. Several conspicuous signs around the lot
  also stated that the lot closed at 600 p.m. and
  that anyone returning after that time could pick
  up their keys at another parking lot operated by
  defendant at a specified location a few blocks
  away. Schroeder had parked there before and knew
  this anyway. In small print on the ticket, there
  was also the statement
• In consideration of low rates charged for
  parking, customer agrees that parking operator
  won't be responsible for loss by fire,
  misdelivery or theft, except such loss be
  occasioned by negligence of operator and then
  only up to a maximum value of 100.
  Proportionately greater rates must be paid in
  advance if customer sets larger limits of
  liability. So, this just tried to limit
  liability for negligence to 100.
• Schroeder returned at 130 a.m. went to
  Allrights other lot, got his key, went back to
  the first lot, and his car was not there. He
  reported it to the police a few days later it
  was found stripped damaged in other ways. He
  sued the lot owner for negligence
• Did the exculpatory clause limit the lots
  liability to 100?
• Did it make any difference that this was a
  so-called bailment?

11
Exculpatory Clauses, cont.

• Allright, Inc. v. Elledge, TX Sup. Ct. 1974
• Elledge had a month-to-month contract with
  Allright to park his car at a lot in downtown
  Dallas near work. The lot attendant always took
  possession of the car key, so it was a bailment.
  Each month he signed a new contract which
  contained an exculpatory clause limiting the lot
  owners liability for negligence to 100. The
  clause was conspicuous and was called to
  Elledges attention before he signed the written
  contract. When his car was stolen, he sued for
  negligence, seeking for the value of his car.
  On appeal, P told the Texas Supreme Court that he
  had been on a long waiting list for the parking
  spot because there was a shortage of parking in
  downtown Dallas. Therefore, he claimed, he had
  little choice but to sign any contract put in
  front of him.
• Was the exculpatory clause enforceable, thus
  limiting Allrights liability to 100?

12
Unconscionability, cont.

• An example of a voidable contractbelongs in
  Chp. 15.
• The doctrine of unconscionability was adopted by
  some courts before there was a UCC, then the UCC
  adopted it for all sale of goods contracts, and
  ultimately courts in all (or almost all) states
  have adopted it as part of the common law for all
  types of contracts.
• Unconscionability is only a defense to a claim of
  breach of contractcant be used as a basis for
  suing someon.
• Requirements
• Procedural unconscionability
• How do you prove this?
• Substantive unconscionability
• How do you prove this?

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Unconscionability, cont.

• Doughty v. Idaho Frozen Foods Corp., p. 343.
• Facts
• Did Doughty prove procedural unconscionability?
• Why or why not?
• Did Doughty prove substantive unconscionability?
• Why or why not?
• Conclusion Rationale?

14
Unconscionability, cont.

• John Deere Leasing Co. v. Blubaugh, U.S. Dist.
  Ct., Kan., 1986.
• Blubaugh was a farmer and leased a new combine
  from John Deere Co. for a 4-year term. He got it
  from a dealer, but the financial arrangements
  were handled by the companys leasing subsidiary.
  There were tax advantages for both parties in a
  lease rather than a purchase. He was presented
  with a standard printed form that seemed to
  include only basic lease terms on the fronthe
  was to pay four annual rentals of 15,991.37, and
  at the end of the lease term would have an option
  to purchase the combine for 27,191.25. He made
  the payments for the first 2 years, then
  terminated the lease returned the equipment.
• There was no question that he breached the lease
  contractthe only question was the amount of
  money he owed. John Deere sold the combine to a
  3rd party in a commercially reasonable way,
  receiving 42,000 for it. John Deer then sued
  Blubaugh for over 12,000, and Blubaugh defended
  by claiming that the terms of the lease for
  calculating the amount that the co. would be due
  upon default was unconscionable.
• The court explained that the lease was an
  adhesion contract drafted by the largest farm
  equipment supplier in the nation, was on paper
  that was so light thin that the dark type on
  the front bled through to the back. On the
  back were terms in very light printthe lawyers
  could not even photocopy it, and the judge had to
  use a magnifying glass to read the back.
• The terms on the back for calculating what the
  customer would owe if he breached the lease were
  in horribly convoluted complex language that
  someone with an accounting degree a law degree
  would have to study it for a long time (I didit
  took forever) to discover that, in addition to
  other amounts of , it required the customer to
  also pay the amount that would be owed if the he
  had actually exercised the option bought the
  combine. The terms on the back led to a
  computation of the termination value of the
  combine of gt 54,000. After subtracting the
  42,000 John Deere got from the sale, they
  claimed that Blubaugh owed them over 12,000.
  Result?