Legality and the Public Interest 12-2 Legality and the Public Interest Legality of purpose is one of the essential elements of an enforceable contract. Although the parties to a contract are legally competent and have reached mutual agreement, the law still requires that the purpose of the agreement be legal and not contrary to the public interest. Learning Outcome 12-1: Discuss the legality of purpose in relation to public interest, and classify illegal agreements into three major categories. Page: 184

Classification of Illegal Agreements 12-3 Three broad classifications of illegal agreements: Agreements that are contrary to the common law. Agreements that have been declared illegal by statute. Agreements the courts have found to be against the security or welfare of the general public. Learning Outcome 12-1: Discuss the legality of purpose in relation to public interest, and classify illegal agreements into three major categories. Page: 184

12-4 Effect of Illegality An agreement with an illegal purpose is usually void and unenforceable. If a divisible contract has several unrelated parts, and one or more parts have a legal purpose, then those components are enforceable. The part or parts that have an illegal purpose are not enforceable. Learning Outcome 12-1: Discuss the legality of purpose in relation to public interest, and classify illegal agreements into three major categories. Page: 184

Example: Effect of Illegality 12-5 Example: Effect of Illegality Facts: Jacob contracted with Thrifty Rebuilders, Inc. to make renovations to his home and to build a new room. After the work began, Thrifty Rebuilders realized that if the room was built, Jacob would be in violation of local zoning ordinances. As the agreement between Jacob and Thrifty Rebuilders is a divisible contract, Thrifty Rebuilders can complete the portion of the contract that involves the other renovations, but cannot build the room since it violates the local zoning ordinances, making that part illegal and unenforceable. Learning Outcome 12-1: Discuss the legality of purpose in relation to public interest, and classify illegal agreements into three major categories. Page: 184

Agreements in Violation of Statutes 12-6 Agreements that violate government statutes are not enforceable by the courts. These are: Agreements made on Sundays or legal holidays. Gambling and wagering agreements. Usurious agreements. Unlicensed transactions. Learning Outcome 12-2: Identify four kinds of agreements that are in violation of statutes. Page: 184

Agreements Made on Sundays or Legal Holidays 12-7 Some statutes and local ordinances, referred to as blue laws, regulate the creation and performance of certain types of contracts on Sundays and legal holidays. In some jurisdictions, a contract that is made on Sunday but carried out on a weekday is invalid. In some states, a Sunday agreement must be ratified on a weekday. Contracts made on a legal holiday can generally be performed the next business day following the holiday. Examples: Contracts involving the payment of a note Delivery of merchandise Repair of equipment Learning Outcome 12-2: Identify four kinds of agreements that are in violation of statutes. Page: 186

Gambling and Wagering Agreements 12-8 A gambling agreement is one in which performance by one party depends on the occurrence of an uncertain event. Some states permit betting on horse or dog races; other states permit state-run lotteries. The state regulates the nature of the betting and usually derives considerable revenue from it. In some states, gambling on Native American reservations is legal. Examples of illegal gambling that is unenforceable: Office basketball pools Football pools Learning Outcome 12-2: Identify four kinds of agreements that are in violation of statutes. Page: 185

12-9 Usurious Agreements Interest is the charge for the use of borrowed money, generally expressed as an annual percentage of the amount of the loan (principal). Nearly every state has laws that regulate interest charges. If a loan is made at an interest rate higher than that allowed by state law, the lender is guilty of usury. Such usurious agreements are illegal and void. In many states, the usury statutes apply to retail installment credit sales and credit card transactions. Learning Outcome 12-2: Identify four kinds of agreements that are in violation of statutes. Page: 185

Unlicensed Transactions 12-10 Unlicensed Transactions Most states require persons engaged in certain businesses, professions, and occupations to be licensed. Persons in licensed professions and occupations include doctors, dentists, lawyers, nurses, pharmacists, plumbers, barbers, and teachers. An agreement with a person who does not have the required license is an unlicensed transaction and is generally illegal if the purpose of the statute is regulatory and enforcement of the licensing requirements is clearly in the public interest. Learning Outcome 12-2: Identify four kinds of agreements that are in violation of statutes. Page: 186

Agreements against Public Policy 12-11 Some agreements are unenforceable because they are contrary to the interests of the public. These agreements: Obstruct or pervert justice. Restrain marriage. Interfere with public service. Defraud creditors and other persons. Contain exculpatory clauses Learning Outcome 12-3: Identify five kinds of agreements that are in violation of public policy. Page: 186

Agreements That Obstruct or Pervert Justice 12-12 Agreements that obstruct or pervert justice: An agreement to conceal a crime or not to prosecute a criminal (such as a thief if he or she returns the stolen property). An agreement to encourage a lawsuit in which one or more of the parties have no legitimate interest, called champerty. An agreement to give false testimony or to suppress evidence. An agreement to bribe a juror or a court official. An agreement to refrain from testifying as a witness in a legal action. Learning Outcome 12-3: Identify five kinds of agreements that are in violation of public policy. Page: 186

Agreements That Restrain Marriage 12-13 Agreements in restraint of marriage are void. Example: A person’s promise to pay money to his or her child on the condition that the child never marries would not be enforceable. If the child agreed to this arrangement and avoided marrying, he or she could not enforce the agreement. Learning Outcome 12-3: Identify five kinds of agreements that are in violation of public policy. Page: 187

Example: Agreements That Restrain Marriage 12-14 Facts: Helen agreed to pay $175,000 if her daughter Linda married Ron, the son of Helen’s business associate. Linda acted upon her mother’s promise and married Ron. This case falls under agreement in restraint of marriage, which is considered void in the eyes of law because it is contrary to the interests of public. Helen’s promise to pay money to Linda on such conditions would not be enforceable. In addition, Linda cannot enforce the agreement if Helen fails to pay the agreed amount. Learning Outcome 12-3: Identify five kinds of agreements that are in violation of public policy. Page: 187

Agreements That Interfere with Public Service 12-15 All of the following agreements are illegal because they interfere with public service: Attempt to bribe or interfere with public officials. Obtain political preference in appointments to office. Pay an officer for signing a pardon. Require one of the parties to the agreement to break a law. Influence a lawmaking body for personal gain. These activities do not involve specific contracts, but are illegal. Learning Outcome 12-3: Identify five kinds of agreements that are in violation of public policy. Page: 187

Agreements to Defraud Creditors and Other Persons 12-16 Agreements to defraud lack the element of legality of purpose, and are void and unenforceable. Example: An agreement to sell or give away property with the intention of defrauding creditors in anticipation of bankruptcy. Learning Outcome 12-3: Identify five kinds of agreements that are in violation of public policy. Page: 188

12-17 Exculpatory Clauses An exculpatory clause is a statement in a contract that releases one party from liability resulting from his or her own negligence throughout the performance of the contract. Exculpatory clauses are contrary to public policy. One party is protected from the consequences of his or her own negligence or willful actions, while the other party is not allowed to recover his or her losses. Exculpatory clauses are illegal when used by companies in a business directly related to the public interest, such as banks, public utilities, and transportation providers. Learning Outcome 12-3: Identify five kinds of agreements that are in violation of public policy. Page: 188

Illegal Restraints of Trade 12-18 Illegal Restraints of Trade Restraint of trade: Agreements to suppress or eliminate competition which are illegal and unenforceable. Monopoly power: When one or more people or firms control the market in a particular area or for a certain product. A monopoly is illegal because it results in a restraint of trade. Learning Outcome 12-4: Illegal restraints of trade. Page: 189

12-19 Sherman Antitrust Act Passed in 1890 by the Congress; also known as the Federal Antitrust Act. It forbids certain agreements that tend to unreasonably inhibit competition, fix prices, allocate territories, or limit production. Persons or businesses found guilty of such practices are liable to punishment by heavy fines and imprisonment, and the contracts will be judged to be void. Example: Two gas stations serve a small town and would charge the same low prices. The purpose of the agreement was to create a monopoly and discourage competition from new gas stations. This agreement would be found to be in restraint of trade and a violation of state law. Learning Outcome 12-4: Illegal restraints of trade. Page: 189

12-20 Robinson-Patman Act The Robinson-Patman Act makes it unlawful to discriminate, directly or indirectly, in matters involving product pricing, advertising, and promotion. It specifically prohibits sellers from discriminating among different purchasers of goods (grade and quality) under certain conditions. The purpose of the act is to ensure that no one customer has an advantage over others. However, a seller of goods can legally charge a certain customer a lower price if he seller can prove that the lower price is due to large quantity of sales to that customer. Example: A large national oil company sells fuel oil in the surrounding area of a midwestern city for a lower price than it does in the city. It controls a substantial share of the market and has little competition. The competition in the surrounding area is largely from small companies. Learning Outcome 12-4: Illegal restraints of trade. Page: 189

Legal Restraints and Government- Granted Franchise 12-21 Legal Restraints and Government- Granted Franchise There are times when agreements in restraint of trade are in the public interest and are legally enforceable. A government-granted franchise is a legal monopoly in which a state or the federal government grants a firm or person a license to operate a bus line, a railroad, etc. Learning Outcome 12-5: Discuss four instances where restraints of trade are legally enforceable. Page: 190

12-22 Private Franchises Private Franchise: A special kind of business organization involving a contractual relationship between a franchisor (the parent firm) and a franchisee (the independent company). In the case of a private franchise, the contractual relationship provides that the franchisor will supply certain services, such as management consulting, to the franchisee and will allow the franchisee to use the franchisor’s name, join with others in national advertising, and secure other benefits. Examples: Fast-food restaurants Postal services Learning Outcome 12-5: Discuss four instances where restraints of trade are legally enforceable. Page: 190

12-23 Zoning Regulations A community may designate certain areas as zones for such uses as light industrial, industrial, commercial, and residential. While zoning regulations are intended to provide security for the citizens of a community, they also may act as legal restraints of trade—because they restrict where and how businesses may operate. Learning Outcome 12-5: Discuss four instances where restraints of trade are legally enforceable. Page: 190

Environmental and Safety Regulations 12-24 Federal and state legislatures have enacted statutes to protect the health and welfare of the general population from the effects of pollution of the atmosphere and bodies of water. Safety regulations serve to protect the health and welfare of the general population of a community, customers, and employees. Safety and environmental regulations serve as legal restraints of trade because they place limits and restrictions on how a firm operates. Learning Outcome 12-5: Discuss four instances where restraints of trade are legally enforceable. Page: 190