Chapter 15: Legality And Public Policy

Question 1

When is an agreement illegal

Answer 1

When it’s formation or performance is a crime or a tort or when it is contrary to public policy or unconscionable

Question 2

Effect of illegality on a contract

Answer 2

Ordinarily an illegal agreement is void and the parties are not entitled to the aid of the courts

Parties cannot sue to obtain performance/damages/set aside agreement

A contract that appears illegal may still be unenforceable if entered into for illegal purpose

Question 3

Neiman v. Provident life & accident insurance

Answer 3

• Neiman illegally practiced law for 7+ years
• after found guilty sought disability insurance benefits for bipolar disorder he said had it’s onset during the proceedings against him
• court would not enforce disability policy as it would be compensation for loss of income he was not entitled to earn
• his wrongdoing voided the insurance contract

Question 4

Exceptions to effect of illegality on contracts

Answer 4

Protection of one party (when the law that the agreement violates is intended to protect one of the parties that party make seek relief)

Cases of unequal guilt- parties are not “in pari delicto”, the least guilty part is granted relief when the public interest is advanced by doing so

Question 5

In pari delicto

Answer 5

Equally guilty

Used in reference to a transaction as to which relief will not be granted to either party because both are equally guilty of wrongdoing

Question 6

Partial illegality of a contract

Answer 6

When an agreement includes several promises only some of which are illegal the legal parts can be enforced if they can be separated from the illegal parts.

If the illegal part of contract can be ignored without defeating basic purpose of contract the legal part may still be enforced

Question 7

Contracts for crimes and civil wrongs

Answer 7

Contracts that call for the commission of any act that constitutes a crime or civil wrong is illegal and void (unenforceable)

Question 8

Good faith

Answer 8

Absence of knowledge of any defects or problems

Question 9

Implied covenant of good faith and fair dealing

Answer 9

(in most jurisdictions) contracts have an implied obligation that neither part shall do anything that will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract

Question 10

Unconscionable clauses

Answer 10

While the court does not ordinarily consider if a contact is fair or unfair in certain (unusual) situations a contract provision may be held to be unenforceable because it is too harsh or oppressive on one of the parties

excessive penalties for breaking the contract, clauses that absolve a dominant party from liability for intentional torts, fraud, gross negligence

May refuse to enforce contract, enforce remainder of the contract without the unconscionable clause, or limit the application of the unconscionable clause so as to avoid an unconscionable result

Question 11

Unconscionable

Answer 11

A provision in a contract that gives (what the court believes is) too much of an advantage over a buyer

A term of ethics or moral philosophy used by courts to prevent exploitation and fraud

Question 12

Slashfrog V. Quick

Answer 12

• Quicks signed an agreement to sell real estate to Slashfrog
• admittedly chose not to seek legal help and did not read contract before executing the agreement
• contract contained production that Quick’s sole remedy in case of Slashfrog breach of contract was a $5000 deposit made by Quicks
• both original and appeal court upheld the contract. “Doctrine of unconscionability does not exist to rescue parties from bad bargains” (Quicks could have chosen to have an attorney and the clause about the $5000 was spelled out plainly in the contract, there was no surprise)

Question 13

How courts determine unconscionability

Answer 13

Two routes:

• analyze elements of procedural and substantive unconscionability. If BOTH are present court may refuse to enforce the provision
• consider doctrine of adhesion to decide if clause is unduly oppressive

Question 14

Procedural unconscionably

Answer 14

Question of freedom of assent resulting from inequality of bargaining power and the absence of real negotiations and meaningful choice or a surprise resulting from hiding a disputed term in an unduly long document or fine print

Question 15

Contract of adhesion

Answer 15

Contract offered by a dominant party to a party with inferior bargaining power on a take-it-or-leave-it basis

(Standardized form contracts)

May sometimes be deemed procedurally unconscionable

Question 16

Arbitration for employment disputes

Answer 16

Supreme court says arbitration is an acceptable forum for resolution of employment disputes and arbitration agreement may be set in place by employer

However increasingly courts will not enforce arbitration agreements that “function as a thumb on the employers side of the scale”

Question 17

When a clause is found to be unconscionable

Answer 17

Court may refuse to enforce contract if entire agreement permeated by unconscionability

May enforce remainder of the contract without the unconscionable clause

Question 18

Agreements contrary to public policy

Answer 18

An agreement may not violate any statute but may still be so offensive to society that the courts feel enforcing the contract would be contrary to public policy

Question 19

Public policy

Answer 19

Cannot be defined precisely - protection from that which tends to be injurious to the public or contrary to the public good or which violates any established interest of society

Certain objectives relating to health, morals, and integrity of government that the law seeks to advance by declaring invalid any contract that conflicts with those objectives even though there is not statute expressly declaring such a contract illegal

Question 20

Lottery

Answer 20

Any plan by which a consideration is given for a chance to win a prize

Consists of three elements
1 - there must be payment of money or something of value for an opportunity to win
2 - a prize must be available
3- the prize must be offered by lot or chance

Question 21

Contracts for gambling, wagers, and lotteries

Answer 21

Generally illegal

Public lotteries and certain types of raffles have been legalized (bingo) (mostly when funds raised for charitable purposes)

Giveaway plans/games legal as long as participation is free (no purchase necessary. Removes element of consideration)

Anything that is predominantly skill rather than luck is not considered gambling

Question 22

Effect of a violation of business regulations in a contract

Answer 22

Depends on how strongly opposed the public policy is to a prohibited act. Sometimes expressly prohibited, sometimes valid anyway

Question 23

Statutory regulation of contracts

Answer 23

Statutes frequently provide that contracts of a given class must follow a statutory model or must contain certain provisions/clauses. May regulation what information must be contained in certain contracts

Question 24

Licensed professions

Answer 24

If a license is required to protect the public from unqualified persons then a contract made by an unlicensed person is unenforceable

Depends on the law of the state but ex: unlicenced contractor (where license is required) cannot sue for claim of work unpaid. If law of state does not expressly set forth that violation of licensing negates right to sue then the right to recover may not be denied

Question 25

Quantum meruit

Answer 25

As much as deserved

An action brought for the value of the services rendered the defendant when there was no express contract as to purchase price

Question 26

Meteor motors v. Thompson Halbach & associates

Answer 26

• Halbach & assoc (who worked out of Arizona) acted as brokers to find dealership for Meteor motors in Florida
• Meteor motors did not pay commission & Halbach brought suit
• decision for meteor BECAUSE Halbach was unlicensed in Florida and state statute (in Florida where transactions took place) says contract with unlicensed broker is invalid.

Question 27

Contracts in restraint of trade

Answer 27

Agreements that unreasonably restrain trade are illegal and void on the ground that it is contrary to public policy. (Monopolies generally illegal)

Question 28

Noncompete provisions

Answer 28

Disfavored but not prohibited in many states (because they are a trade restraint, may prevent employee from making a living, limit employee mobility, be overly protective of employer interests at expense of employees)

May be enforceable if:

• narrowly drawn to protect employer’s legitimate business interests
• is not unduly burdensome on employee’s ability to earn a living
• geographic restriction is not overly broad
• reasonable time limit is given

Question 29

Agreement not to compete on sale of business

Answer 29

(agreement that seller or a business not go into the same business again within a certain geographic area or for a certain length of time

Originally held to be void. Modern courts ask:
- is the restriction imposed on one party reasonably necessary to protect the other party?
If reasonable, it is valid and enforceable (to prevent seller from depriving the buyer of the full value of the acquisition including value of goodwill)

Question 30

Noncompete clauses in employment contracts

Answer 30

Burden of proof is on the employer to show that the noncompete provision is narrowly drawn to protect the employer’s legitimate business interest as to time, place, and activities

Protectable business interests include:

• maintaining goodwill with a existing customers
• confidential information
• trade secrets

If overly broad will be judged unenforceable

Question 31

Genex cooperative v. Contreras

Answer 31

Genex attempting to enforce noncompete agreements for employees who left them to work for a rival

Three different employees, three different agreements all found unenforceable for different reasons

(Expand if discussed in class!)

Question 32

Effect of invalidity of a noncompete clause

Answer 32

Court may:

• trim the restrictive covenant to a reasonable scope and require the parties abide by the revision (blue pencil rule)
• hold that restrictive covenant is void or entire contract is void (restrictive covenant is manifestly unfair, inappropriate for court to effectively write new agreement)

Question 33

Usury

Answer 33

Lending money at an interest rate that is higher than the maximum rate allowed by law

Often prohibited by statute (though may not apply to loans made to corporations)

Question 34

Penalties for violating usury laws

Answer 34

Vary by state

May:

• restrict lender to the recovery of the loan but no interest
• allow recovery of principal and interest up to maximum legal rate
• penality imposed on lender

Question 35

Four elements of a usurious transaction

Answer 35

1. Transaction was a loan
2. Money loaned was required to be returned
3. Interest rate higher than allowed by law was required
4. Corrupt intention to take more than the legal rate for the use of the money loans exists

Question 36

Pinchuck v. Canzoneri

Answer 36

Canzoneri advanced money to pinchuck under two agreements at 144% and 608% “investment profit” contended that transactions were investments not loans and not subject to usury law

Court found for Pinchuck. Transaction met four elements of usurious transactions and that the return was called profit instead of interest didn’t change that

Question 37

Substantive unconscionability

Answer 37

When the actual terms of the contract are so one-sided as to shock the conscious or are so extreme as to appear unconscionable by the mores and business practices of time and place

Arbitration agreement may be substantively unconscionable if fees and costs are so excessive as to deny the litigant the ability to pursue the claim