Chapter 15: Legality And Public Policy Flashcards
When is an agreement illegal
When it’s formation or performance is a crime or a tort or when it is contrary to public policy or unconscionable
Effect of illegality on a contract
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
Neiman v. Provident life & accident insurance
- 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
Exceptions to effect of illegality on contracts
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
In pari delicto
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
Partial illegality of a contract
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
Contracts for crimes and civil wrongs
Contracts that call for the commission of any act that constitutes a crime or civil wrong is illegal and void (unenforceable)
Good faith
Absence of knowledge of any defects or problems
Implied covenant of good faith and fair dealing
(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
Unconscionable clauses
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
Unconscionable
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
Slashfrog V. Quick
- 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)
How courts determine unconscionability
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
Procedural unconscionably
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
Contract of adhesion
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
Arbitration for employment disputes
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”
When a clause is found to be unconscionable
Court may refuse to enforce contract if entire agreement permeated by unconscionability
May enforce remainder of the contract without the unconscionable clause
Agreements contrary to public policy
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
Public policy
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
Lottery
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
Contracts for gambling, wagers, and lotteries
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
Effect of a violation of business regulations in a contract
Depends on how strongly opposed the public policy is to a prohibited act. Sometimes expressly prohibited, sometimes valid anyway
Statutory regulation of contracts
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
Licensed professions
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
Quantum meruit
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
Meteor motors v. Thompson Halbach & associates
- 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.
Contracts in restraint of trade
Agreements that unreasonably restrain trade are illegal and void on the ground that it is contrary to public policy. (Monopolies generally illegal)
Noncompete provisions
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
Agreement not to compete on sale of business
(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)
Noncompete clauses in employment contracts
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
Genex cooperative v. Contreras
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!)
Effect of invalidity of a noncompete clause
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)
Usury
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)
Penalties for violating usury laws
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
Four elements of a usurious transaction
- Transaction was a loan
- Money loaned was required to be returned
- Interest rate higher than allowed by law was required
- Corrupt intention to take more than the legal rate for the use of the money loans exists
Pinchuck v. Canzoneri
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
Substantive unconscionability
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
