Chapter 9 Legality

9.1 Agreements that Violate Statutes The Nature and Consequences of Illegality Even if a contract includes: a valid offer, effective acceptance, genuine agreement, competent parties, and valid consideration it may still be invalid if it lacks legality A contract may be illegal in several ways: Conspiracy- when individuals who agree to commit crimes for a promised consideration

Illegality in Entire Agreement If it is impossible to separate a contract into isolated promises and acts, each of which can be performed independently of the others, then the entire contract is rendered illegal.

In Pari Delicto and Divisible Contracts If certain promises and actions in a contract can be successfully performed by themselves, then the contract is said to be divisible. Example: Fraser, a truck deliver, agreed to drive non-stop from Maine to Nevada to deliver a shipment. Regulations established by the Interstate Commerce Commission prohibit drivers from driving more than eight hours without layover and rest. Fraser’s non-stop trip would take longer than the eight-hour limit.

The main purpose of the agreement, to deliver goods, is legal and can be separated from the illegal part. Consequently, that part of the contract is valid, and Fraser must be paid for delivering the goods. Parties to the contract are said to be in pari delicto- in equal fault if they know that the agreement is illegal In this case the court will aid neither party

On the other hand, if one of the parties is innocent or unaware of wrongdoing, then the parties are not in pari delicto - the court may grant relief to the innocent party This principle is applied when one party does not know that a law is being broken and has no intent to break the law. Example : Leonard agreed to remodel a cottage owned by Harriet so that it could be used as a bed and breakfast. Harriet paid Leonard $18,000 in advance with a promise to pay the balance after the job was completed. Leonard accepted the money, even though he knew that zoning laws would prohibit the placement of a bed and breakfast within the village limits. Harriet knew nothing about the zoning prohibition. The court would rule that Harriet may recover her money because the parties were not in pari delicto.

Agreements that Violate Statutes Civil and Criminal Statutes Agreements that require one party to commit a tort or crime are illegal. Common torts are; slander, libel, and fraud. Common crimes include; burglary, larceny, murder, and arson. An agreement is illegal if it is made to interfere with or violate the rights of another person. Example: Sanger, a candidate for mayor, agreed to pay McLaughlin, a newspaper reporter, $1,000 to write an article containing false statements that would damage the reputation of Bonney, Sanger’s opponent. Because this agreement required McLaughlin to commit libel, it is illegal. A court would not enforcement the agreement if Sanger refused to pay McLaughlin.

Agreements to protect one party from the consequences of torts or crimes are also illegal. Example: The mayor persuaded one of her campaign workers to break into the home of an opponent in the upcoming election. The worker was told to remove papers that would be helpful in the mayor’s reelection campaign. The mayor agreed to pay the campaign worker a large sum of money and to protect the worker from criminal charges if he were caught. The agreement was both illegal and void. The mayor and campaign worker would both be criminally liable for their illegal acts.

Usury Statutes Each state sets a maximum interest rate that lenders can charge for loans by statute. Interest- fee the borrower pays to the lender for using the money Usury- charging more than the maximum legal interest rate Example: Linda wants to buy a car when she turns 18. To make the down payment, she borrows $600 from Robert. Linda promises to pay him $100 per month for 12 months – a total payout of $1,200 for the use of $600. The law would not require her to pay the full $1,200 because she has promised to pay a rate of interest higher than the law permits. The bargain is illegal and courts would not enforce it.

The Truth in Lending Act – lenders must clearly convey the APR on each loan to the borrower Before you sign any loan agreement, be sure to look for a statement of the true rate of interest.

Gambling Statutes State statutes prohibit gambling agreements – one party wins and another party loses, even if some skill may be involved Examples include; playing cards for $, bets on elections or sports These agreements won’t be enforced in court because participants are performing an illegal act. Example: Emil and Rita live in a state where gambling agreements are illegal. They made a $200 bet on the World Series. When Emil won the bet, Rita refused to pay the $200. Emil then threatened to sue Rita in small claims court. Because the bet was illegal, Emil could not collect from Rita.

Only state regulated gambling is legal. Lottery – game that consist of drawing lots, typically tickets with different dumber combinations. Prizes are distributed to winners among persons buying a chance.

Sunday Statutes Under common law, contracts could not be made on Sunday. Today it is legal in most states to create or enforce contracts on Sundays. The exception comes in the form of blue laws – Sunday statutes which make Sunday contracts illegal Since the 1960s, some states have done away with Sunday laws altogether.

In those states that still hold Sunday contracts illegal, the following rules apply: An agreement made on a Sunday is void An offer made on another day and accepted on a Sunday is void An agreement made on a Sunday but dated on a different day is void States that still use Sunday laws, treat Sundays just like other legal holidays.

Licensing Statutes All states require persons to have a license to practice certain trades or professions. License- legal document stating that the holder has permission from proper authorities to carry on a trade or profession

Licensing laws are used for two main purposes: Protect people from unqualified persons To raise revenue Example: For $250, Ardner hired Wheeler, an auctioneer, to sell his household goods at a public auction. The state’s only requirement for an auctioneer’s license, which Wheeler did not honor, was a payment of the $35 fee. After the auction, Ardner learned that Wheeler was not licensed. As a result, Ardner refused to pay Wheeler. Because the statute was for revenue purposes only, Ardner must pay Wheeler the $250. Wheeler, however, is guilty of violating the licensing law.

Assignment Page 193 #1-4 and CT

9.2 Agreements Contrary to Public Policy The Nature of Public Policy Not all illegal agreements directly violate statutory law. Some agreements are illegal because they violate public policy. The ability to regulate the health, safety, welfare, and morals of the public is a power that belongs to the government. The underlying principle that nobody should get away with doing something that harms the public at large is the basis for all public policy decisions.

Violations of Public Policy If an activity harms the health, safety, welfare, or morals of the public, it violates public policy. Restraint of trade- limitation on the full exercise of doing business

Contracts not to compete Price-fixing agreements- when competitors agree on price ranges within which to set their prices Agreements to defeat competitive bidding- rivals submit bids for a project Agreements to obstruct justice Agreements inducing fraud or breach of duty Contracts interfering with marriage

Agreements that Unreasonably Restrain Trade Outright Contracts Not to Compete Goodwill- continued public approval and patronage of the business Restrictive covenant- in some sales contracts, the seller agrees not to open a competing business within a certain area for a period after the sale Must be reasonable in both time and geographic area

Also applies to employees leaving their current employer. These agreements are only enforced as necessary to protect the former employer from unfair competition.

Price Fixing Manufacturers dictate the price at which retailers must sell a product. Discourages competition Raises prices for consumers These agreements are both contrary to public policy and may be prosecuted by state or federal agencies.

Agreements to Defeat Competitive Bidding Laws require governments to construct public works or buy goods and services through competitive bidding. Rivals submit bids for a project Lowest qualified bid wins the contract Example: Central City planned to build three new parks. Only three contractors were available to bid on the projects. Local law required the city government to open the contracts to competitive bidding and to accept the lowest bid for each park project. Before the bidding began, however, the contractors met secretly. They fixed the bids so that each of them would be awarded one of the park projects. This agreement among the contractors is void.

Agreements to Obstruct Justice Any contract that interferes with the administration of justice is illegal. These agreements include; protecting someone from arrest, encouraging lawsuits, giving false testimony, or bribing a juror. Example: Kelly, an employee at Van City, stole $5,000 from the company safe. Kelly returned the stolen money, and Van City promised not to prosecute if Kelly paid them $1,000. Kelly agreed, but then refused to pay Van City the money. The company could not enforce this illegal agreement in a court of law.

Agreements Inducing Breach of Duty or Fraud Many people are in positions of trust. They have the responsibility for the well-being of other people. Representatives in Congress and state senators fall into this category. Any contract that tries to influence these officials to use their positions for private gain in unenforceable.

Agreements Interfering with Marriage The law encourages marriages and protects family relationships. Contracts that discourage, harm, or interfere with good family relationships are illegal. Example: if Mr. Novak promises to give his daughter, Julianne, $1,000 if she never gets married, the contract would be void. The same would be true if, once Julianne were married, Mr. Novak promised her $1,000 to get divorced.

Effect of Illegality In general, a court will not aid either party to an illegal contract. Neither party can enforce the agreement, nor can they receive aid from the court. An exception occurs when the parties are not equally at fault. The court may aid the party who are less at fault in recovering money or property. If legal parts of the contract can be separated from illegal parts, the legal part can be enforced.

Assignment Page 199 #1-4 and CT