Chapter 16 LEGALITY AND POLICY

General Principles Illegality embraces situations in which a statute declares that certain conduct is unlawful or a crime: contracts requiring the commission of a tort. contracts that are contrary to public policy. contracts that are unconscionable. to some extent, contracts that are oppressive, unfair, or made in bad faith.

General Principles Good Faith and Fairness. Unconscionable Clauses. Every contract has an implied duty of good faith and fair dealing. Unconscionable Clauses. Contracts of adhesion.

Effect of Illegality When an agreement is illegal, it is ordinarily void, and no contract arises from it. Courts will not allow one party to an illegal agreement to bring suit against the other party. There are some exceptions to this, such as when the parties are not equally guilty or when the law’s purpose in making the agreement illegal is to protect the person who is bringing suit.

Exceptions to Effect of Illegality Protection of One Party Unequal Guilt Knowledge of Illegal Purpose of Other Party Relief Society, speaking through lawmakers or judges, deems voiding illegal contract unjust when the party meant to be protected is harmed or harshly treated.

Agreements Affecting Public Welfare The legality of an agreement is considered in light of the effect on the rest of society. Whether a contract is contrary to public policy may be difficult to determine because public policy is not precisely defined. That which is harmful to the public welfare or general good is contrary to public policy.

Agreements Affecting Public Welfare Prejudice to Public Policy Illegal Wagers and Lotteries Evasions of Statutory Protection Agreements Negatively Affecting Society Illegal Discrimination Injuries to Public Service Obstructions to Legal Process Illegal Lobbying Conflicts of Interests

Examples of Illegal Agreements Agreements injuring public service, such as an agreement to buy a government job for an applicant. Agreements involving conflicts of interest, such as when the purchasing officer of a government buys from a company that the officer privately owns. Agreements obstructing legal process, such as an agreement with a witness to disappear. Illegal discrimination contracts. Wagers and private lotteries.

Regulation of Business Contracts with Unlicensed Persons in Licensed Callings or Dealings Agreements Impacting Business Fraudulent Sales Usurious Agreements Agreements Restraining Trade Obstructions to Legal Process Agreements Not to Compete Conflicts of Interests

Agreements Not to Compete Contracts in restraint of trade are generally illegal as violating federal or state antitrust laws. Non-compete Agreements are illegal unless the terms are reasonable and it is incidental to the sale of a business or to a contract of employment. Sale of Business. Employment Contract. Effect of Invalidity.

Usurious Agreements The charging by a lender of a higher rate of interest than allowed by law is usury. Courts must examine transactions carefully to see if there is a usurious loan disguised as a legitimate transaction. When sellers of goods offer their buyers one price for a cash sale and another, higher price for a credit sale, the higher price is lawful in most cases.