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

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Sophia Warren
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1 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 Slide 2 Meaning of Illegality When a court determines an agreement illegal, it does not necessarily mean that the agreement violates a criminal law. Legislatures can declare certain types of agreements unenforceable or void Agreements that violate public policy as developed by courts, or expressed in constitutions, statutes, admin regulations. Slide 3 1

2 Other Illegal Agreements Unconscionable agreements and contracts of adhesion. Slide 4 Agreements in Violation of Statutes Some contracts are declared by statute to be unenforceable, void, or voidable. Example: Indiana statute declaring surrogate birth contracts to be void. Common statutes of this type include the following: Usury statutes Wagering statutes Slide 5 Wagering Statutes Wager Neither party has a financial interest in the occurrence of an uncertain event except for the proceeds of the bet. Betting on Lakers: wagering, illegal Risk-shifting agreements: e.g., Insurance company bearing risk of earthquake, legal, since property is an insurable interest. Slide 6 2

3 Public Policy Defined Generally, widely shared view about what ideas, interests, institutions or freedoms promote public welfare. May be based on a prevailing moral code, on an economic philosophy, or the need to protect a valued social institution such as the family or the judicial system. Slide 7 Agreements That Violate the Public Policy of a Statute Even if no statute expressly forbids a type of contract, violation of public policy can be deemed an illegal contract Common agreements that violate public policy include the following: Agreements to commit a crime. Agreements that promote violations of statutes. Agreements to perform an act for which a party is not properly licensed. Slide 8 Agreements Contrary to Public Policy Articulated by Courts Courts have broad discretion to articulate public policy. Public policy can change with the times; changing social and economic conditions may make behavior that was acceptable at one time now unacceptable. Slide 9 3

4 Agreements That May Be in Violation of Public Policy The following are considered vulnerable to attack on public policy grounds.: Agreements in restraint of competition. Exculpatory clauses. Family relationships and public policy. Slide 10 Exculpatory Clauses Exculpatory clause a contract provision that purports to relieve a party from tort liability. Courts are reluctant to enforce exculpatory clauses. Reduces the incentive to use care to avoid hurting others. May have resulted from superior bargaining power possessed by one of the parties. Slide 11 Limitations on Exculpatory Clauses Cannot protect a party from liability greater than negligence. Cannot exclude tort liability for a party that owes a duty to the public. Cannot avoid tort liability in cases where one of the parties is entitled to some special statutory or common law protection. Slide 12 4

5 Factors Courts Apply in Examining Exculpatory Clauses Product of knowing and voluntary consent? Clear language and conspicuous print, or legalese written in fine print? Contract for necessary activity, or frivolous and unnecessary activity? Overly broad, or specific about activity in question? Slide 13 Family Relationships and Public Policy Contracts that unreasonably interfere with family relationships are illegal. - e.g., agreements to divorce or abstain from marriage. Slide 14 Unfairness in Agreements Traditionally, courts were reluctant to look into the fairness of an agreement. Freedom of contract to make bad bargains, so long as no fraud, duress, misrep., mistake or undue influence. Slide 15 5

6 Changing Times Societal changes over time have led to situations of unequal bargaining power, and the rise of standardized form contracts, vitiating the assumption that each party is capable of protecting himself. Parties with superior bargaining power and business sophistication can virtually dictate contract terms to weaker parties in take it or leave it terms. Slide 16 Modern Trends: Gross Unfairness Courts now will occasionally refuse to enforce contracts that are grossly unfair. Courts today can use the concepts of unconscionability or adhesion to analyze contracts that are alleged to be so unfair that they should not be enforced. Slide 17 Contracts of Adhesion and Unconscionable Contracts Unconscionable contract a contract so oppressively unfair that a court would refuse to enforce it. A traditional common law concept borrowed by modern common law courts to set aside some contracts on the basis of gross unfairness. The Uniform Commercial Code also allows courts to refuse to enforce unconscionable contracts. Slide 18 6

7 Consequences of Unconscionability When faced with an unconscionable clause in a contract, a court may do one of the following: The entire agreement is not to be enforced. The contract is enforced except for the unconscionable clause. The unconscionable clause is adjusted. Slide 19 Meaning of Unconscionability Generally means the absence of meaningful choice together with terms unreasonably advantageous to one of the parties. Courts scrutinize the process by which the contract was reached (procedure) and the contract terms (substance). Usually, for a contract or a contract term to be found unconscionable, elements of both procedural and substantive unconscionability must be present. Slide 20 Procedural Unconscionability Defined: Unfairness in the bargaining process. Facts that point to Procedural Unconscionability Fine print or inconspicuously placed terms. Complex, legalistic language. High-pressure sales tactics. Serious inequality of bargaining power. Not enough by itself need substantive unconscionability also Slide 21 7

8 Substantive Unconscionability Contract contains oppressive, unreasonably one-sided, or unjustifiably harsh terms. Examples: A party to the contract bears a disproportional amount of the risk or other negative aspects of the transaction A party is deprived a remedy for the other party s breach A price that is greatly in excess of usual market price Slide 22 Contracts of Adhesion Contract of adhesion A court may use the word adhesion to describe a type of procedural unconscionability A contract presented to a weaker party by a stronger party leaving the weaker party with no practical choice but to adhere to the terms. A standardized form contract. Offered by a party who is in a superior bargaining position. Offered on a take it or leave it basis. With the exception of those that meet the requirements of substantive unconscionability, or a surprise, unexpected term, most contracts of adhesion are enforceable Slide 23 Contracts of Adhesion Unenforceable contracts of adhesion take different forms: Contains a harsh or oppressive term. (substantive unconscionability) Contains an unexpected, surprise term. See: Ramirez v. Circuit City Unconscionable arbitration agreement in employment contract. Slide 24 8

9 Effect of Illegality As a general rule, there is no remedy for breach of illegal agreements. Slide 25 Exceptions Excusable ignorance of facts or legislation. Rights of parties not equally in the wrong. Rescission before performance of illegal act. Divisible contracts. Slide 26 Illegality End of Chapter 15 Slide 27 9

Contract Law Illegality

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