Chapter 9: Illegality

  1. Meaning of Illegality
  2. Agreements are illegal either because
  3. The legislature has declared that particular type of contract to be unenforceable or void; or
  4. The agreement violates a public policy that has been developed by courts or manifested in other sources of law
  5. Courts consider the importance of the public policy involved and the extent to which the enforcement of the agreement would interfere with that policy
  6. Public policy = ideas about promoting public welfare
  7. Straub v. B.M.T.: a contract that relieves a father of his obligation to support his child violates public policy (contradicts the promotion of the public welfare)
  8. 3 Main Categories of Illegal Agreements
  9. Agreements in violation of statutes
  10. Declared illegal by statutes; or
  11. State legislatures sometimes enact statutes that expressly declare certain types of agreements to be void or voidable
  12. Examples
  13. Surrogate birth contracts: declared void by an Indiana statute (note that they are not necessarily void in all states)
  14. Usury: federal law and most state law sets limits on the amount of interest that can be charged for a loan or forebearance
  15. Wagering statutes: all states either completely bar or regulate wagering or gambling
  16. Violate public policy of a statute
  17. Agreements to commit crimes: contracts requiring the violation of a criminal statute are illegal
  18. Agreements promoting violations of statutes: if a person is aware of another person’s illegal purpose of entering into the contract and actively helps to accomplish the purpose, an otherwise legal agreement (such as the sale of goods), will be illegal
  19. Licensing laws: if a person without a license enters into an agreement, the enforceability depends on the type of law requiring the license
  20. Regulatory laws (protect the public against certain behavior): an agreement by someone without a license is unenforceable
  21. Revenue-raising (purpose is to collect $ rather than protect the public): agreement by someone without a license will generally be enforced
  22. Agreements that may be in violation of public policy articulated by courts
  23. Agreements in restraint of competition
  24. If the sole purpose of an agreement is to restrain competition, it violates public policy and is illegal
  25. If the restriction is part of an otherwise legal contract, it may be upheld – Courts look to whether:
  26. The clause serves a legitimate business purpose
  27. The restriction on competition is reasonable in time, geographic area, and scope; and
  28. The clause does not impose undue hardship
  29. Some states prohibit non-competition clauses in employment contracts unless the employer can show
  30. It entrusted the employee with trade secrets or confidential information; or
  31. Its goodwill with near permanent customers is threatened
  32. Also courts bar such clauses that restrict employees from engaging in an occupation that involves relatively simple, repetitive tasks (I.e., salespersons, barbers, and auto trim repair persons)
  33. Exculpatory clauses
  34. Exculpatory clauses relieve one party of civil liability for injury to another party
  35. General rules: courts will not uphold clauses if they
  36. Protect a party from liability for any wrongdoing greater than negligence
  37. Exclude tort liability on the party of a party who owes a duty to the public (I.e., an airline)
  38. Relieve statutorily imposed obligations that benefit one party to the contract (such as worker’s compensation and landlord-tenant laws)
  39. Are unconscionable, a contract of adhesion, or are the product of abuse of superior bargaining power (courts focusing on whether the party with inferior bargaining power gave knowing consent); in Leon v. Family Fitness Center, the court looked factors such as

a)Font size

b)Heading that serves as an alert

c)Bold lettering

d)Title of the document

e)Clarity

  1. Affecting family relationships
  2. Because the family is a valued institution, agreements that tend to interfere with family relationships will be considered illegal
  3. Examples
  4. Agreements to divorce a spouse
  5. Agreements not to marry
  1. Unconscionable agreements and contracts of adhesion
  2. Unconscionability (oppressively unfair terms)
  3. Both the UCC and the Restatement 2d recognize unconscionability as a reason to refuse to enforce contracts
  4. If a court finds terms unconscionable, it can
  5. Refuse to enforce the entire agreement
  6. Refuse to enforce just the unconscionable provision; or
  7. Limit the application of the unconscionable clause
  8. Types
  9. Procedural: unfairness in the bargaining process (I.e., fine print, buried or hidden terms, legalistic language, etc.)
  10. Substantive: unreasonably one-sided terms or unjustifiably harsh terms
  11. Contracts of adhesion
  12. Adhesion contract = usually form contracts that require a party with inferior bargaining power to “take or leave” the terms
  13. Can take 2 different forms
  14. Contain terms that are harsh or oppressive; or
  15. Contain terms to which the adhering party could not be expected to have known he or she was agreeing
  16. Ramirez v. Circuit City Stores, Inc.: adhesion contracts that allow the stronger party to seek redress through the courts while requiring the weaker party to undergo arbitration and that preclude class actions are unconscionable and unenforceable
  1. Effect of Illegality
  2. Generally courts refuse to give any remedy to either party of an illegal agreement
  3. EXCEPTIONS (when courts will provide a remedy even though the agreement is illegal)
  4. Excusable ignorance of facts or legislation (but person claiming damages will not recover for anything he or she does after learning of the illegality)
  5. A party did not share equally in the wrong (less guilty parties) are entitled to receive what they have parted with under the agreement
  6. Rescission before performance of the illegal act (can recover any consideration provided)
  7. Divisible contracts (if part of an agreement is legal and part is illegal, court will enforce the legal part only if it is possible to separate it from the illegal part)