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Business Law

Principles and Practices

Goldman, A. , & Sigismond, W. (2014). Business Law: Principles and Practices (9th ed.). South- Western Cengage Learning.

Cengage Advantage Books

PRINCIPLES AND PRACTICES

egality

CHAPTER PREVIEW

The Nature and General Effect of !legal Contracts

Exceptions to Effect of Illegality ~ypes of Illegal Contracts

Contracts Forbidden by State Statutes Contracts to Commit a Crime or a Tort Contracts That Violate Licensing Statutes Contracts That Violate Gambling Statutes Contracts That Violate Usury Statutes ~ontracts That Violate Sunday Statutes

... ontracts That Oppose Public Policy ~ontracts That Disclaim Liability for

Negligence ~ontracts That Interfere with the

Administration of Justice ::=ontracts That Interfere with the

Performance of a Public Duty ~on tracts That Harm Family Life - ntracts in Restraint of Trade

ontracts That Create a Monopoly or Limit Competition

ontracts That Are Unconscionable

artially Illegal. Contracts

CHAPTER HIGHLIGHTS . . .

~ Suppose ' 1 ~You're the --~DOGE

This chapter examines the last requirement of a valid contract: legality.

Initially, the chapter discusses the nature and general effect of illegal

contracts, the circumstances under which agreements are deemed illegal, a"

the exceptions to the rule that courts will not enforce illegal agreements. The

remainder of the chapter lists and describes the agreements that are genera~

recognized as being illegal in most states. The final section points out the

effect of an agreement that is partially legal and partially illegal.

Facts Jennings and her two children, Matthew, age 11 and Benjamin, age 17, leased an apartment in a subsidized housing complex with very strict rules. Strict rules were required because the rent was low and the amount paid was predicated on the number of people occupying the apartment. The stipulations in the lease al- lowed Jennings to remain in the complex but only under these conditions: (1) that only she and her two children could live in the apartment; (2) that the landlord must be immediately notified if one or both of the children move out; (3) that she was responsible for the actions of all members of the household, including any criminal activity involving any member of the household. Benjamin was arrested and convicted of robbery at a local grocery store. The incident was reported in the local newspaper. The landlord gave Jennings thirty days notice to vacate the apartment because of a lease violation. She refused to move so the landlord had her evicted . Jennings sued to have her lease reinstated.

At Trial Jennings introduced evidence that Benjamin had moved away from the apart- ment complex three months before the robbery occurred. Based on the testi- mony of two persons in neighboring apartments, the landlord offered evidence that Benjamin had been to the mother's apartment and stayed overnight for two evenings prior to the time that the robbery was committed. The trial court ruled that because Benjamin had stayed in the apartment for the two evenings prior to the robbery, he was considered a member of the household and that Jennings therefore had violated the conditions of the lease. The court further ruled that Jennings had to move from the premises. Jennings appealed the case. She con- tended that the contents of the lease were unconscionable.

Questions 1. Define the term unconscionable, in terms of a lease. 2. Are the terms of Jennings lease unconscionable? Explain why or why not.

The Nature and General Effect of Illegal Contracts - - - -------- LEARNING OBJECTIVE~

Indicate the status of illegal contracts-those that are completely illegal; those

containing only illegal clauses.

The fourth and last requirement of a valid contract is that it must be made for a le- gal purpose. As discussed in Chapters 7 through 9, to rise to the level of a contract, an agreement must contain an offer and an acceptance, both parties must receive consideration, and both parties must be competent. Even if these requirements are fulfilled, however, the agreement will still not be recognized as a contract in a court of law if the purpose of the agreement is illegal. The general rule is that illegal con- tracts are void (never existed) and thus unenforceable. The courts in this case leave the parties to such agreements where they are in the bargaining process.

Some agreements, such as agreements to commit crimes, are entirely illegal; others contain only clauses that are illegal. In the event of a lawsuit, a cour t will simply refuse to hear a case involving an illegal agreement if both parties know

pari delicto: persons equally at ~'"'I or equally guilty

the agreement is illegal; in such a case, both parties are in pari delicto (equally at fault). Neither party can successfully sue the other to seek enforcement of rhe agreement, to recover for breach of contract, to regain any consideration giYen, or for unjust enrichment. The court will sometimes hear a case involving an agreement that contains one or more illegal clauses if the agreement is legal in ev- ery other respect. If the court hears the case, it will simply not enforce the illegal clauses.

An agreement (or a clause in an agreement) is illegal if its purpose, or the manner in which it is carried out, is forbidden by state statute or opposed to a state's public policy. Courts in each state have their own interpretation of the term public policy-what is right and wrong. Generally, however, agreements opposed to public policy contain terms that are immoral or unethical or that in- terfere with the health, safety, or general welfare of the public. Courts have been willing to enforce such agreements even though they have not been expressly declared illegal. Public policy, like the common law in the United States, cannot remain static, but must change with the evolution of public opinion, morality, and legislative polices. Our law would fail if it did not reflect a society's chang- ing values over time.

. Exceptions to Effect of Illegality Despite the general rule that an illegal contract is void and unenforceable and that the court leaves the parties where they were in the bargaining process, there are exceptions to the rule that courts will not enforce illegal agreements. These exceptions are intended to prevent the injustice that can result from a rigid appli- cation of the general rule. One exception occurs when the two parties are not equally at fault (not in pari delicto). A court may rule in favor of the more inno- cent party if recovery serves the public interest in some way. For example, when one individual unknowingly deals with a person who is not licensed as required by state law, a court will permit the innocent party to recover any money paid to the unlicensed person for services performed. The focus here is on the conduct of the less guilty party rather than on the illegality of the subject matter of the contract, which is considered incidental to the bargain. Another exception is ignorance of the facts as to the illegality of an agreement. Although the courts will not enforce such an agreement, they will allow a person who has fully performed his or her part of the agreement unaware of the illegality to recover any fees due. If, for ex- ample, you were hired by a manufacturer to transport illegal merchandise from California to New York, you could still collect your fee as long as you were not aware that you were transporting illegal merchandise. Still another exception re- lates to gambling. Statutes in some states permit a person who suffers gambling losses over a certain amount at such forms of gambling as cards and dice to re- cover these losses from the winner. These statutes apply only to gambling that is held at places other than legalized gambling casinos. Under such a statute, for example, a person may recover losses over a certain amount that occurred at a "friendly" poker game at a house party. The purpose of these statutes is not to protect those who lose money. Their purpose is to discourage gambling by put- ting people on notice that they may have to return their winnings to the loser.

Types of Illegal Contracts There are two reasons a contract may be illegal: if the contract is in violation of state statutes or if the contract is opposed to public policy. Contracts that are ex- pressly or impliedly forbidden by statute or by public policy are generally unen- forceable, even if both parties are ignorant of the facts constituting the illegality and did not intend to break the law. The illegal agreements discussed in this chapter are generally recognized as illegal in most states. Keep in mind that while illegal contracts have civil penalties, one or both parties may also be subject to criminal penalties if the act to be performed according to the agreement is a cnme.

' I ; . II

- --- -- -- --- "

Contracts Forbidden by State Statutes

LEARNING OBJECTIVE ~ State those illegal contracts

forbidden by state statute.

licensing statute: law requiring persons to be licensed to practice their occupation

First we discuss agreements that violate state statutes. State legislatures have passe, laws declaring certain types of agreements illegal and void because they cannot be performed without violating the state's civil and criminal statutes, licensing stat- utes, gambling statutes, usury statutes, or Sunday statutes. Keep in mind that a contract or a clause in a contract may be illegal even though there is no specifi state statute prohibiting what is to be performed under the terms of the contract.

Contracts to Commit a Crime or a Tort Agreements are illegal if they require one party to commit a tort or a crime. Thi is the most obvious category of illegal contracts. Examples of common torts are assault and battery, slander, libel, fraud, and the infliction of emotional distres on another. Arson, murder, burglary, bribery, larceny, robbery, selling illegal drugs, and buying stolen property are examples of acts that are considered crimes. Agreements to commit any one of these torts or crimes could not be en- forced by either party. They would be absolutely void. To allow people to go to court to obtain enforcement of these types of agreements, which are so obviously contrary to law, would be ridiculous.

Johnson entered into an agreement to sell illegal drugs to Morgan for $1,500. The court most likely would rule this agreement to be void and unenforceable.

In this example, even if Morgan paid the $1,500 in advance, a lawsuit to get the money back will most likely not be successful because the transaction was illegal (selling illegal drugs) in the first place.

Agreements to protect one party from the consequences of his or her tort or crime are also illegal.

The mayor induced one of her campaign workers to break into the home of an opponent in the upcoming election and to remove papers that would be helpful in the mayor's reelection campaign. The mayor agreed to pay the worker a large sum of money and to protect the campaign worker from criminal charges if caught. The agreement was illegal. The mayor and the campaign worker were both criminally liable for their illegal acts.

Contracts That Violate Licensing Statutes All states have licensing statutes, laws that require some individuals to have ali- cense or permit to practice their occupations. These laws are designed to protect people from dealing with unqualified individuals. In most states, doctors, den- tists, nurses, lawyers, pharmacists, public accountants, surveyors, architects , real estate brokers, insurance agents, funeral directors, barbers, veterinarians ,. beauticians, electricians, plumbers, and contractors must be licensed. When state statutes require a person to have a license to perform services for the general pub- lic, an agreement made with an unlicensed person is illegal. The person perform- ing the unlicensed act has also committed a crime, as for example when a pharmacist whose license was suspended (unknown to the owner of the pharmacy) dispensed prescription medication to Medicaid recipients amounting to $91,000 for several months following the suspension. In this case, the money obtained was illegal and the act of dispensing the medication was criminal.

Because the agreement is illegal, an unlicensed person cannot legally collect for the services performed. In some states, a person who performs services without the required license is guilty of a crime punishable by a fine, imprisonment, or both.

Weinstein completed graduate school and graduated with a degree in veterinary medicine. He had not, however, passed the state boards qualifying him for a license to treat animals. When a family, aware that

ing: legal form of playing for - es, such as in a lottery

-.bling: illegal agreement in which -: ::>arty wins and another loses = y by chance

Weinstein had graduated as a vet but unaware that he had not passed the state boards, asked him to treat their family dog for a serious hip problem, he did so and then sent them a bill. Later, the family discovered that he was not yet licensed and refused to pay. Because Weinstein was practicing veterinary medicine illegally (without a license), he could not collect the fee for his services. Weinstein may also be criminally liable for practicing medicine without a license.

If a person unknowingly deals with an unlicensed individual, the courts will allow that person to recover any money paid.

Some licensing statutes are merely intended to obtain revenue for the state or local government. Any person paying the fee can obtain a license without show- ing competence in a particular trade or profession. Because the purpose of such revenue-raising licensing statutes is not the protection of the public, agreements made with unlicensed persons are legally binding. The unlicensed person, how- ever, is still subject to a criminal penalty for violating the licensing statute. In assessing the penalty, courts will take into consideration such factors as harm resulting from failure to obtain the license and the extent of knowledge of the persons involved.

For $250, Arden hired Gammons, an auctioneer, to sell Arden's household goods at a public auction. The state's only requirement for an auctioneer's license, which Gammons did not obtain, was the payment of a $100 fee. After the auction, Arden learned that Gammons was not licensed and, as a result, refused to pay Gammons the $250. Because the statute was for revenue purposes only, Arden must pay Gammons the $250. Gammons, however, is guilty of violating the licensing law and may face action from the state.

Contracts That Violate Gambling Statutes Gaming in the United States has undergone a great boom, from Native American casinos and other regulated commercial casinos, to gaming online (Internet gam- ing). Each state is free to regulate or prohibit it. If you count state-run lotteries, almost every state allows some form of gaming. At this point we should distin- guish between gaming and gambling. Both refer to agreements in which one party wins and another party loses purely by chance, even though skill (in most cases) is involved. Gaming, however is an activity that has been legalized, and consequently, those who participate are not subject to criminal prosecution, even if they make a profit while engaged in the activity. Gambling, on the other hand, is an illegal activity simply because the law does not sanction it. For example, go- ing to a casino and winning money is legal and would be considered gaming; however, organizing a poker game at your home and arranging to make a profit for yourself on each hand would be considered gambling. A simple poker game in which all players are on an equal footing (no one earns anything from the game other than as a mere player) would be gaming as long as social games are allowed in the state where the game takes place. It would be referred to as recre- ational gambling. Some states do not allow recreational gambling and may even consider participation in such an activity a misdemeanor. States that do allow recreational gambling may place a limit on what a player may win or lose. Bingo is considered gaming, but it could become gambling if a bingo party is arranged without getting a license in states where a license is required.

Legal gaming activities in many states include state lotteries; casino betting; pari-mutuel betting on horses at race tracks; bingo games; Monte Carlo nights; raffles conducted by charitable, religious, and educational organizations; slot ma- chines; keno; video blackjack machines; and video poker games. The most popu- lar forms of illegal games are "numbers," which is actually a lottery, and betting with bookies, typically sports betting (e.g., a football pool or a bet on a prizefight).

recreational gambler: one who gambles for pleasure

professional gambler: one who gambles as a profession or business

RYou t eac

There are also homespun illegal games such as playing cards for money in your own home or at club meetings. Games such as those used by stores for promo- tional purposes are legal as long as they do not require participants to buy some article or ticket. States look at gaming in economic terms. In return for legalizinc certain forms of gaming, a state collects a percentage of the gaming profits.

Internet (online) gambling that originates primarily from offshore sites is a huge business. All a person has to do to commence gambling is to open ar:. account, deposit funds in this account, and start betting. These offshore sites. however, compete with state lotteries (which are legal) for business. The Justice Department at first said that online gambling is illegal under the Federal Wire Act of 1961. They then modified their stand. It now states that it is against fed- eral law to take sports, casino, and poker bets, but not illegal to place those bets. While authorities have not pursued individuaL bettors pLaying poker on their home or office computer, they have gone after some gaming executives. Online gaming companies, however, maintain that U.S. laws don't apply to them be- cause they are located in places where online gaming is legal, such as England. Costa Rica, and Gibraltar. They claim that the United States would be reachin beyond its legal authority to prosecute someone in another country. However, a U.S. Attorney promised to go after those individuals who disregard federal an state laws. The Unlawful Internet Gambling Act, passed in 2006, strengthens the Federal Wire Act. This bill places significant impediments on the operations o: fly-by-night offshore Internet gambling companies. The act makes it more diffi- cult to place bets online by restricting (actually outlawing) certain financi<L transactions. In fact, it is against federal law for banks to handle online gamblinc transactions (e .g., players making deposits or withdrawals into or from an online casino). The legality of the online gaming industry is questionable and confusing. While legislation has tried to clear the air and send a message to operators an players alike, the ability of the U.S. government to regulate transactions in cyber- space is limited. With the popularity of the online offshore accounts, the politi- cal cost of enforcement is high.

Those who gamble illegally may be classified as recreational or professiona.. gamblers. Recreational gamblers participate in a gaming event socially and fo:- pleasure. Professional gamblers engage in gambling activities as a business o:- profession, hoping to make a profit. Their involvement with gaming is generall: considered a crime. Recreational gamblers are not ordinarily subject to a crimi- nal penalty (police seldom bother them), but they may not generally enforce thei: gambling agreements in court; as gamblers, they are performing an illegal act.

Martin and Spicer lived in a state in which recreational gaming was illegal but not criminally wrong. They made a $100 bet on a heavyweight boxing match. When Martin won the bet, Spicer refused to pay the $100. Because the bet was illegal, Martin could not collect from Spicer even if Martin decided to sue in small claims court. Because they were recreational gamblers, neither party was criminally liable.

Rissone received a letter from a magazine publisher inviting her to enter the compa- ny's $10,000,000 sweepstakes promotion by simply returning a book of certificates with her name already typed on them. In the same envelope was an invitation to b one of the company's new books, Eat Better, Live Better, at a reduced price. She di~ not have to buy the book in order to enter the sweepstakes, however. Risson:o returned the certificates, but she did not win anything. She was so irritated that shE notified the company that they were carrying on an illegal gambling activity.

Questions 1. Was the magazine publisher carrying on an illegal gambling activity? Explain

your answer. 2 . Are giveaways used for promotional purposes lawful? Explain.

: fee paid by borrower to :-'or the use of money; also,

ght to use of or claim on real

. charging a higher rate of :=s· than allowed by law

Contracts That Violate Usury Statutes Many states have laws that limit the interest a lender can charge. Interest is the compensation or fee that a borrower pays to a lender for the use of money. If the interest rate charged by the lender exceeds the legal rate allowed by state law, the lender has committed usury. Interest rates are simple, not compound, interest unless otherwise stated. Usurious agreements are illegal. You might also say the usury is a complicated area of law and sometimes confusing because many types of loans are exempt from the usury laws of a particular state and each state han- dles the legal ramifications of the law differently. To determine what interest rates are considered usurious and the penalties imposed, you would need to visit each state's usury law statute books or contact the state agency that regulates banking and commerce.

Madison wished to buy a used car to drive to a local college where she was enrolled and to her part-time job. She did not have good credit, so banks in the community where she lived turned her down for a car loan. She saw an ad in the local paper in which an individual was offering to sell a used older-model car for $5,000. When Madison contacted this individual, this individual was willing to sell her the car but would charge interest at the rate of 20 percent per year until the car loan was paid off. If you lived in a state where 14 percent was the maximum allowed by statute, Madison's agreement with the lender would generally be considered illegal.

Usury laws were passed to protect certain borrowers from paying excessively high interest rates. Since the loan to Madison would be considered usurious and the lender was an individual and not a bank or a finance company, she could file a complaint in the small claims court in her town, village, or city and present legal proof that the rate of interest for the loan was above that allowed by the statute in her state. She would most likely win her case. The civil penalty for usury varies among states. In many states, the lender will be denied the right to collect any interest. In some states, the lender forfeits the excess interest received over the rate allowed. In a few states, the court is given permission by statute to set the amount of damages, which could end up being double the usurious rate.

A person familiar with the usury law of his or her state might say, "I am pay- ing much more than that (referring to the usury law of her state) on my car loan at my bank." That is correct! Banks, licensed pawnbrokers, credit unions, and finance companies have separate rules thanks to a series of Supreme Court deci- sions which changed things to facilitate business deals. If the usury rate in a par- ticular state is 24 percent, a bank or small loan company in that state may legally be charging 30 percent or more. Or, a so-called payday loan or tax refund loan may have a legal rate over 300 percent. National banks, as the result of the Supreme Court ruling in Marquette National Bank v. First of Omaha Corp., are able to charge their customers (no matter where the customers are located) the rate of the state in which the bank has its main offices. In this Supreme Court case, even though the customers in Marquette lived in Minnesota, the fact that the bank had its main offices in Nebraska allowed it to charge its Minnesota customers the higher Nebraska interest rate. Following the passage of this law, a deluge of national banks moved their main offices to states that either repealed their usury statutes or had no interest rate cap. The result is that outer space has become the limit for consumer loan rates. It has been stated that some of the rates being charged by lending institutions may embarrass loan sharks.

Usury statutes apply only to loans of money, not to sales of merchandise on credit, even if the seller charges a higher interest rate than is permitted. Although credit sales are not governed by state usury laws, they are regulated by other state statutes and by the federal Truth in Lending Law. Usury laws and the Truth in Lending Law will be further discussed in Chapter 35.

Sunday laws: laws governing types of transactions that can be performed on Sunday

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Contracts That Violate Sunday Statutes Sunday laws, or blue laws as they are sometimes called, govern the types of tran:.- actions that can be performed on Sundays. People's attitudes have changed since Sunday laws were first passed during the colonial period. As a result, laws re- stricting business and other activities on Sundays have been changed by modify- ing state statutes, by passing local ordinances, or by court decisions. Most states have either repealed or modified their Sunday statutes. Sunday laws that remain. are often not enforced with the exception of those related to the sale of alcoholi- beverages. In the few remaining states that have such statutes, the types of con- tracts that are illegal vary from state to state. The most common statute declares an agreement illegal and void if it is made on a Sunday or is to be performed on a Sunday. A court will not aid either party if there is a violation of a Sunday law.

Some courts hold that parties to an agreement made on a Sunday may ratify it on a regular business day. Complete performance by both parties or partia: performance by one party also acts as a ratification of the agreement. After rati- fication, the courts consider the agreement remade on the weekday and enforce it as such.

In most states, repayment of money due on a Sunday or legal holiday can be postponed until the first business day after the Sunday or holiday.

Murphy, who borrowed $250 from McGrath, agreed to repay the loan in sixty days. The due date of the loan fell on a Sunday. Murphy would not be obligated to repay the loan until Monday, the next business day.

Sunday laws do not apply to agreements made to protect life, health, or prop- erty or made on behalf of religious or charitable organizations. In some states. Sunday laws do not apply to persons who observe the Sabbath on some other day.

Answer True (T) or False (F). 1. To say that an illegal contract is void means that by

law the contract never existed. T F 2. If both parties to an illegal agreement are in pari delicto,

neither party can successfully sue the other to seek enforcement of the agreement. T F

3. While illegal contracts have civil penalties, the parties involved may also be subject to criminal penalties. T F

4. Charging interest in excess of the legal rate is considered usury. T F

5. An agreement to rob a bank is an example of a void contract. T F

Contracts That Oppose Public Policy - LEARNING OBJECTIVE ~

State those illegal contracts opposed to public policy.

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An agreement, or a clause in an agreement, opposed to public policy may be ille- gal even though there is no specific state statute prohibiting its performance un- der the terms of the agreement. Such agreements are considered illegal and void in most states, however, because they are opposed to public policy and would negatively impact society. While public policy may be viewed as a catchall, i- most often applies to contracts that are injurious to peace, health, good order, or established morals of society (a public sense of what is right and wrong). It ha been said that the law fails if it does not reflect a society's changing social and moral values. It must change with the evolution of public opinion, morality, and legislative policies. Agreements in this category include those that disclaim liabil- ity for negligence, interfere with the administration of justice, interfere with the

atory clause: contract clause : '1g a party from liability for =ence

ct of adhesion: contract ~ ing clauses with unfavorable ~ supporting a party seen as

g a superior bargaining position

performance of a public duty, harm family life, unreasonably restrain competi- tion and trade, create a monopoly or limit competition, or are unconscionable.

Contracts That Disclaim Liability for Negligence Businesspeople and others often place exculpatory clauses in agreements, excus- ing themselves in advance (or at least limiting their liability} from any payment for injury or damages caused by their acts. An exculpatory clause is viewed with disfavor by the courts because it may enable a person to escape paying damages for wrongful conduct. Courts tend to judge the legality of such clauses on a case- by-case basis. An exculpatory clause is generally held to be contrary to public policy and therefore void and unenforceable against an injured party. Although recognizing the importance of freedom of contract, the courts also wish to pro- tect members of the general public who are not always alert to the consequences of signing a contract containing a clause that relieves business-people from liabil- ity. Such clauses are especially likely to be held unenforceable if one party is re- quired to sign the agreement on a take-it-or-leave-it basis because the other party is in a superior bargaining position. A contract written exclusively by one party considered to be in a superior bargaining position and containing unfavorable clauses is called a contract of adhesion. Examples of those in superior bargaining position include apartment owners, banks, leasing companies, and car dealers.

The Randy White automobile dealership agrees to repair the transmission of a car brought into the dealership by Seager, one of its regular customers. The dealership, however, placed a clause on the work order (contract) in fine print that the dealer "will not be liable for any mistakes it may make during the repairs." This clause is unenforceable, especially because the dealership is in a superior bargaining position. However, it will be liable if, because of negligence on the part of the mechanic doing the repairs, the transmission is not properly repaired.

Karen leased an apartment from Todd in a rundown neighborhood. Shortly after signing the lease and moving in, Karen fell down a flight of stairs in an unlit stairwell when an unrepaired step collapsed. She was severely injured. When Karen brought a suit for injuries suffered, Todd's lawyer introduced into evidence a clause in fine print in Karen's lease that stated: "The tenant agrees to hold the owner of the premises harmless from any claims for injuries no matter how caused." Despite this clause, Todd is still liable because the exculpatory clause in the lease is unenforceable: It is a violation of public policy.

Not all exculpatory clauses are against public policy. This is especially true when the party seeking enforcement is not considered to be in a superior bar- gaining position because of the nature of the service it provides. Health clubs and amusement parks are good examples of businesses in this category. They often use exculpatory clauses to limit their liability for injuries to those who accept their services. Even so, the clauses inserted in any agreement cannot be too broad.

When Benz became a member of the Supercare Health Spa, he was required to complete and sign an application that included a release, on which was written in bold print, "relieving the spa owners and operators from all risks of injury that a member suffers while participating in club activities." One evening, as Benz was leaving the shower at the spa, he slipped on the wet tile floor, fell, and was injured. It was determined that the injury resulted from the spa's negligence in maintaining the shower room. The spa claimed that regardless of this fact, the release form that Benz signed relieved the owners from liability. The spa would probably lose this case.

lobbying: trying to influence lawmakers to vote for or against legislation

In this example, a court would probably rule that the exculpatory clause con- tained in the application was against public policy and void. The clause as written was too broad: It relieved the club of liability for all injuries sustained by a mem- ber while participating in club activities (i.e., regardless of how the injury occurred). If the spa wished to include in its application a clause that could be up- held in court (and that would therefore be binding on those who signed), the clause should have been worded so that the spa was relieved of liability for negligence only (negligence of spa employees or negligence in maintaining spa equipment). Wording that narrowed the grounds for relieving the spa of liability would have increased the chances of the court's ruling in favor of the spa if a lawsuit arose.

Exculpatory clauses that relieve a party from liability for injury or damage beyond its control will usually be upheld in court.

In most cases, courts will not enforce exculpatory clauses that attempt tore- lieve a contracting party from his or her own criminal conduct, from intentional injury or damages, or from gross negligence. To uphold such clauses would place the rights and safety of the party or parties signing such agreements in jeopardy.

In some states, exculpatory clauses in certain types of contracts, such a leases, have been declared illegal by statute.

Contracts That Interfere with the Administration of Justice Agreements that tend to interfere with the proper administration of justice-thar prevent the law from being applied fairly- are illegal. Examples of agreement that tend to obstruct justice include an agreement to pay a witness to give fal se testimony or to conceal evidence during a court trial, an agreement to pay a ju- ror to vote a certain way in a trial, and an agreement not to prosecute a person who has committed a crime in return for a sum of money.

Russ was the receiver of taxes for the town of Millan. Because she was heavily in debt due to gambling, she embezzled $5,000 from the tax fund to pay off her debt through an accounting manipulation of the tax records. The town supervisor discovered what Russ had done and promised not to report the matter to the police if she agreed to pay him $1,000. Russ agreed but then changed her mind and refused to pay this money to the supervisor. The supervisor could not enforce this illegal agreement in a court of law.

Furthermore, because these agreements may also require the commission of a crime, the parties may be subject to criminal penalties.

Contracts That Interfere with the Performance of a Public Duty People have the right to expect that elected and appointed officials will perform their duties properly and honestly. Agreements that tend to prevent the proper performance of duties by public officials are opposed to public policy and therefofl illegal. An agreement to bribe a judge, a police officer, or the district attorney iL return for a favor is illegal. Likewise, an agreement is illegal if a public officia: agrees to accept money for performing a legal duty, for promising not to perform a legal duty, or for promising to use personal influence to affect the passage of a law.

Lobbying is the practice of trying to influence the members of a legislatin: body to pass or defeat certain bills. As a rule, lobbying is not illegal. You ca;:; make an agreement to pay an attorney or an expert in a particular field to presec.: your case to the lawmaker, leaving it up to the lawmaker to decide on the issue_ An agreement to influence a legislator's decision by using bribery, threats, a.- other improper means, however, is illegal.

An influential state senator agreed to accept $10,000 from Taber in return for influencing other legislators to pass a law permitting a certain

nant: a promise not to compete

expensive drug to be removed from the prescription list and made an over-the-counter drug. The senator succeeded in getting the law passed, but Taber refused to pay. Because this agreement was illegal, the senator could not seek payment from Taber in a court of law.

Because these agreements, like many other agreements mentioned in this chapter, often involve the commission of a crime_, the parties to an agreement that interferes with the performance of a public duty may be subject to criminal penalties.

Contracts That Harm Family Life Our society favors and encourages marriage and family life. Therefore, agree- ments that place unreasonable restraints or tend to discourage marriage com- pletely are generally illegal. For example, agreements are illegal if one party promises never to marry, promises not to marry for an unreasonable amount of time, or promises not to marry a certain person.

Siegel, fearing his only daughter would leave him, promised to give her $15,000 if she would never marry. The daughter agreed and accepted the $15,000. Two years later, she married. Siegel sued to recover the $15,000. The agreement is illegal, and he is not entitled to recover the money.

On the other hand, an agreement that places a reasonable restriction on mar- riage is legally binding. For example, the courts have held that an agreement to postpone marriage until reaching the age of majority is legal. This postponement is considered legal detriment.

Because the law seeks to preserve marriage, an agreement between a hus- band and wife to obtain a divorce for consideration is illegal and will not be enforced.

Jason promised to give his wife $50,000 and a trip around the world if she would divorce him. His wife obtained a divorce, but Jason refused to carry out his part of the agreement. Because this agreement was illegal, Jason was not legally bound.

Contracts in Restraint of Trade A covenant in restraint of trade is an agreement whereby one party agrees to re- strict (1) his or her freedom to trade or conduct his or her profession or business, (2) his or her business in a particular locality (i.e., where), or (3) his or her busi- ness for a specified period of time (i.e., when). This covenant may be contained in a separate contract standing by itself or it can be a clause added to a contract. Covenants not to compete are often found in contracts for the sale of an ongoing business or included in employment contracts. Illegality is determined by the degree of restrictiveness sought by the party preparing the agreement. Covenants are valid if they are reasonable; however, covenants that are too restrictive are illegal, void, and therefore, unenforceable. The common law is inclined against agreements that prohibit or restrain a person from earning a living. On the other hand, the law imposes a limit on contractual freedom in certain cases in order to preserve this freedom. The following discussion will clarify the common law's rationale that led to this conclusion.

Purchaser of a Business When a person buys a business such as a recording studio, a tool and dye busi- ness, or a computer sales and service center, that person is also buying the seller's goodwill, the continued patronage of old and loyal customers. No one would want a business if the seller could open a similar business nearby and draw away the old customers. The purchaser needs some assurance that customers will con- tinue to trade at the old store. Consequently, it is customary to include in the

purchase agreement a clause that prevents the seller from competing in the same business within a certain territory for a certain period of time. This clause is re- ferred to as a covenant not to compete (also known as a noncompete agreement). A covenant is legal and enforceable if the restrictions in terms of scope, time, and locality are no more than what is reasonably necessary to protect the legitimate interests of the party imposing the restraint. If the restrictions are unreasonable, the clause is illegal and void because the effect is to curtail competition and restrain trade, which violates the antitrust laws. The onus of proving reasonable- ness is on the party imposing the restraint. A very unique business may require a longer noncompete time than a business in a more conventional area. For exam- ple, in an extreme case, a buyer of an armament business for a large amount of money was permitted to restrain the seller from competing with this busines anywhere in the world for twenty-five years due to the worldwide operation of the business sold, plus the fact that its main customers were governments.

A territory restriction should not go beyond the trade area of the business. The trade area for a small card and gift business might be a mile or two. If a busi- ness is citywide, such as a Laundromat with stores in various neighborhoods, a clause restricting competition anywhere in the city might be reasonable. Simi- larly, if the business is statewide or national, such as a well-known chain of mo- tels, a restriction not to compete anywhere in the state or nation may be upheld as reasonable.

A time restriction should not be longer than is reasonably necessary for the purchaser to obtain the goodwill of previous customers and attract new custom- ers. In the sale of a popular fine-dining local restaurant, twenty-five years would be unreasonable, two or three years may be reasonable, while a restriction of one year or less is pretty safe.

Santos operated a computer sales and service center in a town of about 35,000 people. He sold his business to Murdock. The written sales agreement included a clause preventing Santos from opening a computer sales and service center in the town for a period of six months. Because both the time and territory restrictions were reasonable for a town of 35,000 people, the clause in the sales agreement would most likely be enforced in a court of law.

Employment Contracts Territory and time restrictions imposed by the purchaser of a business may also be imposed by an employer upon an employee who leaves his or her present job to work for a competing business. Should an employee sign? There is no right an- swer. Employers are generally permitted more protection against the subsequenr activities of senior employees than of junior employees or temporary employees. The employer must establish his legitimate interest in imposing the restriction because of a trade connection or a concern about trade secrets. The employer. however, cannot protect himself against the employees' personal skill and knowl- edge, even if acquired in the course of the employers' business. The employer must also show that the restraint is reasonable.

Noncompete agreements have become more common, and they are no;: going away. As loyalty between businesses (especially corporations) and their employees hits an all-time low, employers claim that more employees are defect- ing to competitors and divulging company secrets, keeping their companies, em- ployers say, from maintaining their competitive position. They can't risk havin competitors obtain trade secrets, which can be anything the employer deems sen- sitive or privileged: information about new software, hardware, telecommunica- tions, customers, or whatever. To protect themselves, employers are increasingly asking all workers-not just the executives-to sign noncompete agreements preventing these workers from either setting up a similar business or working for

a competitor who provides the same services as the old employer. Even employ- ees forced out of their jobs may be required to sign a noncompete agreement. Noncompete clauses are common in industries ranging from pharmaceuticals high-tech, and telecommunications to fast-food, sales, and consumer products. Generally speaking, agreements with noncompete clauses are interpreted ac- cording to the rule of reason, which means that they must be reasonable in terms of time period, geography, and what the person can and cannot do. Today's non- compete clauses generally bar someone from working for a rival for six months to five years. A five-year noncompete clause may run into trouble in some states as being too restrictive. According to the rule of reason, an employee skilled in two fields can be restricted in one field but not both.

When Detailman was hired at Tangles, a local hair salon, he was required to sign an employment contract that included a noncompete clause agreeing not to work for another salon within the 79904 ZIP code area for eighteen months after leaving the current salon. He did leave Tangles after three months and was immediately hired by a salon in the same zip code area. The new salon, however, specialized in ethnic hair care. Detailman had to be completely retrained in this area of expertise. All the training received at Tangles was actually of no use to him. Detailman did not provide his new employer with a customer list from Tangles. His former employer at Tangles sued Detailman, claiming that he (Detailman) was in violation of his noncompete clause.

In this example, assuming that Detailman was not violating any technical requirements under the law, a court most likely would rule that he was not in violation of his noncompete agreement and could not be stopped from compet- ing. The new salon was providing completely different services from those of Tangles. In addition, Detailman did not provide his new employer a customer list of his clients from Tangles, which most likely would have been considered insig- nificant after only three months of employment at this salon.

Frequently, a partnership agreement between professional people contains a clause stating that upon retiring or leaving the partnership, the partner will not start a competing business. These clauses are also enforceable if the restrictions on territory and time are reasonably necessary to protect the remaining partners.

Court Treatment of Unreasonable Noncompete Clauses Courts generally do not favor noncompetition agreements because, as mentioned earlier, they prevent a person from working and earning a living. Consequently, many states either prohibit or heavily regulate these clauses. Noncompete agree- ments have been invalidated when an employee was fired without cause (did not do anything wrong) or was not reasonably compensated in exchange for signing the noncompete agreement. These states have taken this approach because so many noncompete clauses are deemed too restrictive. When noncompete clauses are found to be unreasonable, courts in different states generally will follow one of these guidelines:

1. Throw out the clause entirely, leaving the remainder of the agreement to be enforceable. This is the more common approach.

2. Apply the blue pencil doctrine, which holds that the court has the power to rewrite the covenant so that it is less restrictive. This way of dealing with the situation is relatively rare.

Applying the blue pencil doctrine is not what the courts wish to do. Most courts instead will follow the first procedure. Most important, if you are asked to sign a noncompete agreement that can substantially affect your livelihood, contact an attorney first.

unconscionable agreement: contract so unfair or one-sided that it will not be enforced

Contracts That Create a Monopoly or Limit Competition A monopoly occurs when one person or business controls all or nearly all the trade or supply of a particular item within an area to the exclusion of all compe- tition. An agreement to create or maintain a monopoly is not only opposed r public policy, but it is also a violation of federal and state laws. These laws, calle- antitrust laws, are discussed in more detail in Chapter 28.

Four trash-hauling companies in a certain city attempted to avoid a "trash war" by agreeing not to solicit each other's accounts through agreements containing covenants not to compete. During the seven years that this agreement lasted, the companies brought in more than $20 million in total revenue. Because the trash-hauling companies tended to create a monopoly, their agreements were illegal and therefore unenforceable. What the trash haulers did might also be considered a criminal conspiracy. If convicted, the penalty could be a fine, imprisonment, or both.

Not all monopolies are illegal, however. Companies such as utilities compa- nies are given the exclusive right by government to provide a product or service within a certain area. Only when a business deliberately and unreasonably seeks to eliminate competition is it illegal. Microsoft Corporation is a good example. It started as a partnership in 1975, but due to the ingenuity of the two origina: partners, it has become a giant corporation and has developed into the world- wide leader in services and Internet technologies for personal and business com- puting. The U.S. Department of Justice brought a lawsuit claiming that Microso~ used its power to target competitive companies and should be broken up rc weaken its monopoly power and increase competition, even though it appear· that Microsoft became a dominant force as a result of the skill and innovatiw practices of its original founder. The business has developed into what might be considered a natural monopoly with no evil intent, but rather a focus on develop- ing technology for the next-generation Internet. Microsoft is working to enable businesses to be collaborative and offers an unprecedented range of integrated and customized solutions that enable their customers to act on information wher- ever and whenever they need it.

An agreement that limits competition by controlling or fixing prices, divid- ing up trade territory, or limiting production is also considered illegal and vio- lates both federal and state antitrust laws.

Contracts That Are Unconscionable Unconscionable agreements violate public policy. An unconscionable agreement is one that is entered into under the following circumstances: (1) A party lack the knowledge and/or understanding of the terms of the agreement or (2) the agreement is too grossly unfair or harsh. With regard to the first reason, some contracts are written in a very legal form using "lawyer language" that one party to the agreement does not understand. Or, the agreement may contain terms in very small print limiting the liability of one of the parties or include hidden clauses in fine print that the party obligated to sign the agreement missed. With regard to the second reason, there are no limits to the types of contracts a courr will find unfair or harsh. Among modern court decisions, including decision governing the sale of goods under the UCC, unconscionability has been applied to contracts involving questionable sales tactics, unequal bargaining power o · the parties, the basic illiteracy of one party, and grossly excessive price terms. Unconscionability bas been applied to standard contracts that favor one party over another, such as a lease that favors the landlord or an insurance policy that favors the company and must be accepted on a take-it-or-leave-it basis, contract with clauses disclaiming liability, and contracts with provisions requiring a buyer to waive certain legal rights.

Belmede, a migrant from a foreign country with an inability to speak English well, signed a car loan to purchase a van through a dealership that supposedly charged her 15 percent interest. The salesperson told Belmede that as an immigrant with little credit history, 15 percent was the best she could expect. She was unaware that other local dealers were charging as low as 4 percent. Belmede, a single mother of four who was working two jobs, felt she had no other choice. She signed the original paperwork agreeing to pay what she thought was 15 percent interest and made a down payment of $2,500. A week later, the dealership called her back to sign additional paperwork, saying that the van would be repossessed if she didn't sign. Belmede signed without reading anything. A friend encouraged her to check with another dealership offering vans at a lower interest rate. This new dealership reviewed her paperwork with the original dealership and discovered that she was actually paying 29 percent interest. Her $9,000 van was going to cost her more than $16,000 over the life of the loan, despite her having paid $2,500 as a down payment. Belmede attempted to get out of her loan agreement with the original car dealer but was turned down. When she refused to continue payments as agreed, the original car dealer sued.

Because this contract seemed unfair (unconscionable), a court most likely would refuse to rule in favor of the original car dealership that had made what would be considered a predatory car loan.

By now, you may have begun to realize by the nature of the discussion in this section that the defense of unconscionability is seldom applied to contracts be- tween business persons. One party is generally a consumer.

artially Illegal Contracts

EARNING OBJECTIVE~ Describe the effect of contracts

that are partially legal and partially illegal.

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A contract may be partially legal and partially illegal. The legal part of the con- tract may be enforced as long as severance would not distort the remainder, sub- stantially change the contract, or deprive one party of substantially the whole or main consideration under the original contract. If the contract is so complicated that it is not possible to separate the illegal part, the entire contract is void and unenforceable.

McGrail was studying to become a licensed electrician. It was illegal in his state to perform services for the public without a license. Nevertheless, he purchased and then installed some light fixtures for a neighbor. Even though McGrail could not collect for the cost of his labor in installing the light fixtures because he was not properly licensed, he could collect for the cost of the light fixtures.

Answer True (T) or False (F). 1. A public garage's disclaimer of liability for a car lost or

stolen because of the garage owner's negligence is likely to be unenforceable. T F

2 . Exculpatory clauses relieve a party in advance for liability for the tort of negligence. T F

3. If an agreement contains an illegal part that can be separated, the entire agreement is void. T F

4 . Knebel's parents promised her $5,000 if she would not marry before age 21. This agreement is void. T F

5. A professional gambler is one who participates in a gambling event socially and for pleasure. T F

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Key Points in Chapter • • • • The law imposes a requirement that the purpose of the agreement be legal. Agreements that are completely ille- gal are usually void and unenforceable. Some agreements are entirely illegal; others may only contain illegal clauses. The courts will not assist parties to a contract that is illegal by enforcing the contract or permitting re- covery of benefits conferred under it.

There are exceptions to the rule that courts will not enforce illegal agreements. One exception occurs when both parties are not equally at fault. A court may in this case come to the aid of the party who was unaware of the facts that made the agreement illegal.

Important Legal Terms

contract of adhesion

covenant

exculpatory clause

gambling

gammg

in pari delicto

interest

licensing statute

Questions and Problems for Discussion

1. Max was adjudicated incompetent by a court having proper jurisdiction. Which of the following statements is correct regarding contracts subsequently entered into by Max? (a) All contracts are voidable. (b) All contracts are enforceable. (c) All contracts are void. (4) All contracts are valid.

2. What is the reasoning behind why an illegal contract is not enforceable in a court of law?

3. What are covenants not to compete? What is the standard used to judge their legality?

4. Manix paid the local district attorney $1 ,500 a month for a year not to prosecute him for operating an illegal gambling establishment. Manix then decided to quit the business. He now seeks to recover the money paid to the district attorney on the grounds that his payment over the year amounted to a bribe and was therefore illegal. Can Manix recover the money?

5. Karns leases his small private plane to others interested in recreational flying. One Sunday morning, Ashbery rented the plane for the day. Karns was unaware that Ashbery rented the plane to haul illegal drugs from one location to another, which is in violation of both state and federal law. Can Ashbery refuse to pay Karns the rental fee claiming that the agreement was illegal?

6. Moran owned a woodcarving business situated in a plaza in Valley Forge, Pennsylvania. He carved unique items such as toys, picture frames, and miniature model cars that would sell quickly. His products were very popular, and people would

An agreement may be illegal either because it is for- bidden by state statute or because it is opposed to a state's public policy.

An agreement may be partially legal and partially i.- legal. If it can be separated from the part that is illega:.. the legal part of the agreement may be enforced where severance would not distort the remainder, substantiall. change the contract, or deprive one party of substan- tially the whole or main consideration under the origina contract.

lobbying

professional gambler

recreational gambler

Sunday laws

unconscionable agreemem

usury

come to his plaza store to make purchases. Moran also traveled to various parts of Pennsylvania selling his items at various town events. Because his items were unique, he had no competition. Ritz, a person who worked for Moran and possessed the same talents, offered to buy the business if Moran would sign the following statement as part of the contract of sale: "I agree not to reenter my current business in Valley Forge, Pennsylvania, or to travel anywhere in the state of Pennsylvania to sell the items that I currently make and sell or to compete in any manner; I further agree to refer all business contacts that call me to Ritz. This clause is valid for ten years." In violation of this agreement, Moran opened a similar business in competition with Ritz and in violation of the noncompete agreement. Is the covenant not to compete valid and enforceable in this case?

7. Madison took his Porsche to the Downtown Repair Shop for some major repairs that would take three days. The repair order form prepared by the repair shop that he signed contained the following statement: "Not responsible for loss or damage to cars or articles left in cars in case of fire, theft, or any other cause beyond our control." While at the repair shop and under its control, Madison's car was stolen. Madison sued Downtown Repair Shop for failing to deliver the car to him. Is Downtown Repair Shop liable?

8. You and Higgins made a $50 bet on the outcome of the Super Bowl. After your team won, Higgins

refused to pay you the $50. Could you legally sue H iggins for the $50? Rene, who came from a wealthy family, was a teacher in what was considered a rural school district. She and her friend Curtis, an attorney, lived together, although they were not married. Rene got pregnant. She got frightened that a nonmarital pregnancy would prevent her from getting tenure (a permanent appointment) on her job. She and Curtis agreed to get married and stay married until after she had the baby and received tenure on her job, both of which would occur in approximately one year. For doing this, Rene promised to give Curtis $35,000. They wrote up an agreement specifying the conditions under which they would marry and then divorce. Rene had her

ases for Review

Jorge Arrospide Sr. gave his son, Jorge Arrospide Jr., power of attorney to act on his behalf. To pay his father 's medical bills, Jorge Jr. borrowed $4,000 on behalf of his father from Carboni, giving Carboni a secured note. There was no other source of funding available. Carboni said, "Take it or leave it ." Carboni added on interest at the rate of 200 percent per year. (This loan was exempt from the usury laws in California because Carboni was a licensed real estate broker.) The 200 percent interest rate was ten times the interest rate then prevailing in the credit market for similar loans. Carboni also advanced additional funds to Jorge Sr. When Jorge Sr. failed to make any payments on the note after demand, Carboni sought to foreclose on Jorge Sr.'s real property. By this time, the amount of the debt with interest was 100 times the original debt. Jorge Sr. argued that the loan agreement was unconscionable and that the original debt should be re-formed to reflect a lower rate of interest. Carboni argued that the loan was legitimate and that Jorge Sr., should not have borrowed the money if he ould not pay. What do you think the outcome

should be? (Carboni v. Arrospide, 2 Cal. Rptr. ld 845)

• Eelbode, who applied for a job at the Travelers Inn, was required to take a preemployment physical exam. He was sent to the Chec Medical Center. As part of his physical, he met with Grothe, a physical rherapist , who put him through certain tests involving bending exercises in which he had to use his back and his knees. Prior to the physical, he was required to sign a document releasing the Chec .\1edical Center and the Washington Readicare .\fedical Group and its physicians from all liability arising from injury to him while participating in the exam. During the exam, he did suffer an injury to

child and also got a permanent appoinrmenr at her school. The conditions having been fulfilled, they then divorced, but Rene refused to pay Curtis the $35,000. Can Curtis legally collect this money?

10. Lando, chairwoman of an environmental group, was interested in the passage of a bill that banned smoking in all public places. For $2,000, she hired an attorney to draft the bill and argue for its passage before a senator interested in environmental matters. This senator was convinced of the value of the bill and urged other senators to vote in favor of its passage. The bill was passed by the legislature and became law. The attorney then demanded payment. Can Lando refuse payment on the grounds that what the attorney did was illegal?

his back and his right leg. Eelbode filed a suit against Chec and Grothe, claiming that he was injured because of a strength test that was improperly administered. Grothe and Chec filed a motion of summary judgment asking that the case be settled in their favor because of the statement that Eelbode signed. Should Eelbode be successful in his lawsuit? (Eelbode v. Chec Medical Centers, Inc., 984 P.2d 436)

3. Singletary, as owner of a multistory building, leased the first floor to Topp Copy Products. A toilet in an apartment above Topp Copy Products developed a leak and did substantial damage to Topp Copy's inventory in the leased space. Topp Copy sued Singletary for water damages based on negligence. Singletary claimed that his defense was an exculpatory clause in the lease agreement that stated that he was released from any and all liability for damages that "may result from the bursting, stoppage, and leakage of any water pipe . . . and from any damage caused by the water . . . and contents of said water pipes." Topp Copy disagreed with Singletary, stating that an exculpatory clause did not relieve Singletary from negligence caused by his or her own negligence. Is Topp Copy correct? (Topp Copy Products, Inc. v. Singletary, 626 A.2d 98)

4. In the state of Hawaii, a person must meet certain educational requirements and pass a written exam to be granted a license to practice architecture. Once the initial license is received, an annual license fee is required to maintain the license. Wilson was granted an architecture license and paid the first annual fee. One year he failed to pay this fee. During this time, he contracted with clients for approximately $34,000 of architectural services. The defendants refused to pay the bill because

Wilson had not renewed his license. Wilson sued for his fees. Could he collect even though he had not renewed his license? (Wilson v. Kealakekua Ranch, Ltd., and Gentry Hawaii, 551 P.2D 525)

5. Berner and a number of other investors purchased stock from a San Francisco- based stock brokerage firm known as Bateman Eichler by getting an inside tip from one of the brokers employed by the firm (an illegal practice called trading on insider information) . Based on the tip, the stock would rise in value, and the investors would make a large profit. When the tip turned out to be false, Berner and the other investors sued the stock brokerage firm for its losses because the market price of the stock fell far below the prices they paid for it. The trial court dismissed the complaint, concluding that the agreement to purchase the stock was illegal because the parties to the lawsuit were in pari delicto. Consequently, the plaintiffs were absolutely barred from recovery. An appeals court reversed the lower court's ruling and claimed that, regardless of the in pari delicto ruling by the lower court, Berner and the investors could still collect. Bateman Eichler appealed this decision to the U.S. Supreme Court. Should the Supreme Court decide in favor of Bateman Eichler, the stock brokerage firm? (Bateman Eichler, Hill Richards Inc. v. Berner, 472 u.s. 299, 310)

6. The University of California Medical Center admitted Tunkl as a patient. While under sedation and unable to read, Tunkl was required, as a

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condition for admission, to sign a document containing a clause releasing the hospital from an and all liability for the negligent or wrongful act its employees. Alleging personal injuries from the negligence of two physicians at the Medical Ceme: Tunkl sued the hospital for damages. Can the hospital excuse itself from any and all liability fro= the wrongful acts? (Tunkl v. Regents of Univers it-: of California, 383 P.2d 441)

7. Beaver participated in the annual Elkhart Grand Prix go-kart races in Elkhart, Indiana. She signed an exculpatory agreement containing the release c- the race organizers from all liability associated with the races unless a claim at issue involved willful misconduct. During the event in which she drove, a piece of polyurethane foam padding used as a course barrier was torn from its base, and it ended up on the track. One portion of the packinc struck Beaver in the head, and another portion was thrown into oncoming traffic, causing a multikarr collision, during which Beaver sustained severe injuries. Beaver filed an action against the race organization, claiming that the foam padding use on the course was defective. She further claimed that because of the defects in the padding, the exculpatory agreement was illegal and void. The race organizers contended that the exculpatory agreement released her from any liability. Who is correct? (U.S. Court of Appeals, 7th Circuit, 246 F 3d 905)