Contract Law Illegality

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Charlene Haynes
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1 Contract Law Illegality Illegality An agreement can be illegal because Legislature has declared that particular type of contract unenforceable or void It violates public policy Determining Illegality Courts consider Importance of the public policy involved Extent to which enforcement of the agreement would interfere with that policy Seriousness of wrongdoing involved in the agreement Copyright Thomas P. Langdon. All Rights Reserved. 1

2 Types of Illegal Agreements Violate statutes Violate public policy developed by courts Unconscionable agreements and contracts of adhesion Agreements declared illegal by statute Usury Statutes Limit the amount of interest that can be charged for a loan Wagering Statutes Neither party has financial stake in uncertain event Agreements Violating Public Policy Agreements to commit a crime Agreements that promote violation of statutes e.g. sale of goods to be used for illegal purpose Seller must be aware and actively help accomplish the illegal purpose Copyright Thomas P. Langdon. All Rights Reserved. 2

3 Agreements Violating Public Policy Licensing Laws If statute is regulatory (legislation to protect public), agreement by unlicensed person is unenforceable Statute imposes character/skill requirements If statute is revenue-raising, agreement generally enforced Agreements Violating Public Policy articulated by the Courts Agreements in Restraint of Competition One of the oldest common law policies Closely scrutinized by courts If sole purpose is to restrain competition, violates public policy Examples Non-Competition Agreements Exculpatory Clauses Unreasonable interference with family relationships Non-Competition Clauses Non-Competition clauses are enforceable if the restriction 1. Serves legitimate business purpose Have interest to protect Ancillary to otherwise valid agreement 2. is reasonable in scope, time, and geographic area 3. Does not impose an undue hardship on the public or the party whose ability to compete is restrained Courts tend to judge non-competition clauses in employment agreements by a stricter standard than sale of business Copyright Thomas P. Langdon. All Rights Reserved. 3

4 Typical Restrictions in Employment Agreements Non-Competition Clauses Confidentiality agreements Nondisclosure agreements Non-solicitation agreements Exculpatory Clauses Contract provision that purports to relieve one of the parties from tort liability Suspect on public policy grounds A party who contracts away his liability for negligence will not have incentive to use due care An agreement that affords one party such a powerful advantage may be result of abuse of superior bargaining power Exculpatory Clause Issues Cannot protect party from liability for any wrongdoing greater than negligence Not effective if party owes duty to the public presents obvious threat to public health and safety Statute & common law may conflict with the application of the clause Unenforceable if unconscionable, a contract of adhesion, or the result of superior bargaining power. Copyright Thomas P. Langdon. All Rights Reserved. 4

5 Unconscionable Contracts Applies in UCC and Common Law Generally construed as Absence of meaningful choice, plus Terms unreasonably advantageous to one of the parties Types of Unconscionability Procedural: unfairness in bargaining process Substantive: contract is oppressive, unreasonably one-sided, or unjustifiably harsh Consequence of Unconscionable Contracts Court can manipulate contract to achieve just result Refuse to enforce agreement Refuse to enforce unconscionable provision Limit application of unconscionable provision Contract of Adhesion Contract offered by party in superior bargaining position on take it or leave it basis Often applies to form contracts A type of procedural unconscionability Copyright Thomas P. Langdon. All Rights Reserved. 5

6 Effect of Illegality General Rule: No remedy for breach Exceptions Excusable ignorance of facts / legislation One party was aware of illegal nature Does not involve immoral act or serious threat to public welfare Rights of Parties not equally in the wrong Recission before performance of illegal act Encourages people to cancel illegal contracts Divisible Contracts Copyright Thomas P. Langdon. All Rights Reserved. 6

Illegality. Illegality. Meaning of Illegality. Irwin/McGraw-Hill 2001 The McGraw-Hill Companies, Inc. All Rights Reserved.

Illegality. Illegality. Meaning of Illegality. Irwin/McGraw-Hill 2001 The McGraw-Hill Companies, Inc. All Rights Reserved. Illegality Chapter 15 (8) Slide 1 Illegality When an agreement involves an act or a promise that violates some legislative or court-made rule, agreement will not be enforceable on ground of illegality