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Business Law
Principles
and Practices 8e
Arnold J. Goldman William D. Sigismond
Chapter 10: Legality
The Nature and General Effect of Illegal Agreements
The fourth and last requirement of a valid contract is that it must be made for a legal purpose.
The general rule is that illegal contracts are void (never existed) and thus unenforceable.
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In Pari Delicto
In pari delicto: persons equally at fault or equally guilty.
A court will refuse to hear a case involving an illegal agreement if both parties know it is illegal.
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Illegality
Agreements to commit crimes are entirely illegal.
Other agreements may contain illegal clauses.
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Exceptions to Effect of Illegality
When the two parties are not equally at fault (not in pari delicto).
Gambling losses (statute varies by state).
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Types of Illegal Contracts
The contract is in violation of state statutes.
The contract is opposed to public policy.
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Agreements Forbidden by State Statute
Agreements that violate civil and criminal statutes.
Agreements that violate licensing statutes.
Agreements that violate gambling statutes.
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Agreements Forbidden by State Statute
Agreements that violate usury statutes.
Agreements that violate Sunday statutes.
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Licensing Statutes
Licensing statutes: laws requiring persons to be licensed to practice their occupation.
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Gaming and Gambling
Gaming: legal form of playing for stakes, such as in a lottery.
Gambling: illegal agreement in which one party wins and another loses purely by chance.
Internet gambling is illegal.
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Types of Gamblers
Casual gambler: one who gambles for pleasure.
Professional gambler: one who gambles as a profession or business.
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Interest and Usury
Interest: fee paid by borrower to lender for the use of money; also, legal right to use of or claim on real property.
Usury: charging a higher rate of interest than allowed by law.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Sunday Statutes
Sunday laws: laws governing types of transactions that can be performed on Sunday.
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Agreements Opposed to Public Policy
An agreement, or a clause in an agreement opposed to public policy may be illegal even though there is no specific state statute prohibiting its performance under the terms of the agreement.
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Agreements Opposed to Public Policy
Agreements that disclaim liability for negligence.
Agreements that interfere with the administration of justice.
Agreements that interfere with the performance of a public duty.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Agreements Opposed to Public Policy
Agreements that harm marriage.
Agreements that unreasonably restrain competition and trade.
Agreements that create a monopoly or limit competition.
Agreements that are unconscionable.
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Exculpatory Clause
Exculpatory clause: contract clause excusing a party from liability for negligence.
Not all exculpatory clauses are against public policy.
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Contract of Adhesion
Contract of adhesion: contract containing clauses with unfavorable terms supporting a party seen as holding a superior bargaining position.
Examples of those in superior bargaining position include apartment owners, banks, leasing companies, and car dealers.
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Administration of Justice
Agreements that tend to interfere with the proper administration of justice—that prevent the law from being applied fairly—are illegal.
Furthermore, because these agreements may also require the commission of a crime, the parties may be subject to criminal penalties
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Interference With Public Duty
Lobbying: trying to influence lawmakers to vote for or against legislation.
An agreement to bribe a judge, a police officer, or the district attorney in return for a favor is illegal.
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Agreements That Harm Marriage
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.
On the other hand, an agreement that places a reasonable restriction on marriage is legally binding.
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Restraint of Competition or Trade
Covenant: a promise not to compete.
Illegality is determined by the degree of restrictiveness sought by the party preparing the agreement.
Territory and time restrictions should be reasonable.
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Noncompete Clauses
Court treatment of unreasonable clauses:
Throw out the clause entirely.
Apply the blue pencil doctrine.
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Creation of Monopolies
Not only opposed to public policy but is also a violation of federal and state laws.
Not all monopolies are illegal, however.
Utility companies.
An agreement that limits competition by controlling or fixing prices, dividing up trade territory, or limiting production is also considered illegal and violates both federal and state antitrust laws.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Unconscionable Agreement
Unconscionable agreement: contract so unfair or one-sided that it will not be enforced.
A party lacks the knowledge and/or understanding of the terms of the agreement
The agreement is too grossly unfair or harsh.
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Partially Illegal Agreements
The legal part of the agreement may be enforced if it can be separated from the illegal part.
If the agreement is so complicated that it is not possible to separate the illegal part, the entire agreement is void and unenforceable.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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