Legality

1
Legality

• The fourth required element of a K

2
Legality

• To be enforced in court, a contract must call for
  the performance of a legal act
• No desire to allow parties to profit from
  wrongdoing
• But what if only one party is doing something
  illegal?

3
Legality

• Statutes may prescribe the terms of a contract
• Statutes may proscribe the terms of a contract
• Public Policy considerations may preclude certain
  contracts from being enforced

4
Contracts Contrary to Statute

• Usury - maximum APR
• Gambling - form that gambling may take
• Sabbath Laws - must be narrowly drawn so as not
  to promote the establishment of religion
• Licensing - barbers, doctors, CPAs
• Contracts - the mob

5
Contracts Contrary to Public Policy

• Restraint of Trade
• Covenants not to compete?
• Exculpatory Clauses
• Adhesion Contracts
• Discrimination
• Commission of Tort
• Interference w. Public Duty/Process

6
Contrary to Statute v. Contrary to Public Policy

• Contrary to Statute
• Explicit prohibition or prescription
• Details are statutorily defined
• Easier to understand
• K is never formed, b/c it is void from the start

• Contrary to Public Policy
• Viewed as having a negative impact on society
• Not necessarily expressly prohibited by statute

7
Effect of Illegality

• Whether contrary to policy or statute, end result
  is the same...
• Contract is not enforced
• Courts tend to take a hands off attitude....
  equitable maxims

8
But make sure its illegal...

• Usury
• generally corporate agreements will be exempt,
  given nature of risk taken, business purpose,
  competency of parties
• Gambling
• creation of risk for the purpose of assuming it
• distinguish insurance, risk sharing...

9
Insurance Contracts

• An agreement to compensate policy buyer under
  certain circumstances involving an existing risk
• Why not illegal as gambling devices?
• no creation of risk... it already exists
• insurable interest concept...
• you probably cant take out insurance on my life

10
Hmmmmmm....

• Could Fr. Malloy therefore claim that a contract
  that he enters into that would pay the University
  money if the football team does not win a bowl
  game be considered valid as an insurance
  contract, rather than an illegal gambling
  contract?

11
Blue Laws

• Why cant you buy alcoholic beverages in Indiana
  on Sunday?
• Existence and enforcement varies significantly
  from state to state
• What is wrong with book statement saying that
  these laws are contrary to the freedom of
  religion?

12
Licensing Laws

• Enter into a K with a person not licensed to
  provide that service?
• look to underlying purpose of the licensing
  statute
• Protection of Public?
• K will be illegal and unenforceable
• Raise Revenues?
• K will normally be enforceable
• practitioner subject to sanction

13
Contracts to commit a crime...

• Cement overshoes...
• Sale of drugs...
• spelling of drug on controlled substances
  schedule
• But what if sale merely assists an illegal
  objective?
• sale of knife to the killer of Nicole Simpson?

14
Agreements in Restraint of Trade

• Contracts in Restraint of Trade
• Price fixing
• Universities and financial aid compact, shared
  admission forms...
• Anti-trust
• Airlines
• Microsoft and deals with computer manufacturers
• Covenants not to compete
• Restrictive employment contracts

15
Covenant Not to Compete

• Usually OK if it is ancillary (i.e., supplemental
  or auxiliary) to a legitimate business
  transaction
• as in sale of business
• employment K
• But still must be reasonable in terms of
• time (length)
• geography

16
Restrictive Employment Contracts

• Reasonable if
• no greater than is necessary to protect the ER in
  legitimate business interest
• not unduly harsh and oppressive in curtailing
  opportunities of the EE
• Must be reasonable from a public policy
  standpoint such that public is not being denied
  an essential service
• Subject to intense scrutiny by courts...

17
Illegality Based Upon Unequal Bargaining Power

• Adhesion Contracts
• Exculpatory Clauses
• Unconscionable Ks

18
Adhesion Contracts

• Always construed against ___________
• Look for unequal bargaining power and/or
  unconscionability.... not all pre-printed form Ks
  are adhesion Ks!!!
• but if it is... obligation to read and understand
  K might go away

19
Adhesion Ks... General Rule

• Party seeking to enforce the K has burden of
  showing that provisions were explained to other
  party, came to her knowledge, and real and
  voluntary meeting of the minds took place... not
  merely an objective meeting of the minds

20
Unconscionability

• Williams v. Walker Thomas, Jones v. Star Credit
  Corp.
• UCC 2-302
• ... might be procedural (inducement w/o
  meaningful choice) or substantive (unduly unfair,
  one-sided)
• remember, though, court doesnt look at adequacy
  of consideration... cant rush to a determination
  of unconscionability

21
Exculpatory Clauses

• Some key points
• oppressive nature?
• unconscionability?
• absolves from negligence?
• Classic clause on p. 251
• usually cant exculpate responsibility for
  negligence. Why?

22
Exculpatory Clauses

• Not usually enforced if business is important
  (public necessity) b/c that would amount to
  exercise of unfair bargaining power...
• e.g., utilities, transportation services, etc.
• But frequently will be enforced in some
  non-essential (amusement type) enterprises
• batted ball at Coveleski?
• bungee jumping?

23
Exculpatory Clauses

• Will usually be enforced if exculpation is for
  harmful incident outside of the control of the
  operator
• e.g., batted ball v. crashing airplane
• Will usually not be enforced if exculpation is
  for incident within the control of the operator
• e.g., batted ball v. crashing airplane v. assault
  in parking garage due to broken lights

24
Effect of Illegality

• Remember general rule that illegal Ks are void
• courts take a hands off attitude
• in pari delicto
• But remember exceptions, too
• common sense for most part
• Severable legal intentions will be enforced

25
Problem 13-2

• Restraint of trade?
• Unless ancillary to certain types of business k
• Reasonableness
• Two possibilities
• Reasonable and therefore enforced
• Illegal and unenforceable

26
Problem 13-3

• K with unlicensed person
• Purpose of licensing statute
• regulatory
• revenue raising
• Enforceable if purpose is to raise revenue but
  problem for bartender

27
Sample Exam Question

• 1. If Brian offers to sell Troy his bicycle but
  Troy learns prior to accepting Brian's offer that
  the bicycle was actually sold to Claudia, then
• a. the sale of the bicycle will automatically
  revoke the offer made to Troy and Brian will bear
  no liability.
• b. Brian will be able to avoid liability for
  damages only if he provides an acceptable
  substitute to Troy.
• c. Brian will be liable for any damages resulting
  from his breach of his contract with Troy.
• d. None of the above.

28
Sample Essay Question

• Discuss and explain whether or not there is valid
  consideration for each of the following promises
• (a) Al and Bob entered into a contract for the
  purchase and sale of goods. Al subsequently
  promised to pay a higher price for the goods when
  Bob refused to deliver at the contract price.
  (Provide the general rule under the common law,
  and if applicable, how the matter would be
  resolved under the UCC.)
• (b) Carol executes a promissory note to pay
  Dave, her secretary, 1000 a year for five years
  in consideration of the fine work that Dave had
  performed for Carol on a recent project that
  resulted in Carols receiving a much sought after
  promotion.