15-1 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

15-2 Chapter 15 Illegality

15-3 Illegality If yes If enforceable

15-4 Introduction 1)Illegality – contract unenforceable if formation or performance is illegal or contrary to public interest 2)Types of Illegality a)Behavior violates statute/rule of common law b)Made illegal by statute c)Contrary to general rule of public policy d)Surrogacy agreements against public policy 3)Presumption of legality – resolved in favor of legality of agreement unless parties intended illegal bargain (rebuttable presumption)

15-5 Effect of Illegality General Rule – hands off illegal agreements – unenforceable on their faceGeneral Rule – hands off illegal agreements – unenforceable on their face Ignorance of Fact or Special Recognition – courts have allowed recovery if one/both parties ignorant of facts that made it illegalIgnorance of Fact or Special Recognition – courts have allowed recovery if one/both parties ignorant of facts that made it illegal –Recovery only allowed for period before illegality discovered –Recovery not allowed if not immoral behavior or threat to public welfare –If one partys actions are illegal by violation of a statute applying only to that party, the other party can still recover

15-6 Effect of Illegality Rights of Protected Parties – party protected by a statute can enforce contract or recover considerationRights of Protected Parties – party protected by a statute can enforce contract or recover consideration Rescission before Performance of Illegal Act – the party that rescinds before illegal act occurs can recover considerationRescission before Performance of Illegal Act – the party that rescinds before illegal act occurs can recover consideration Illegal & Divisible ContractsIllegal & Divisible Contracts –If contract divisible courts enforce legal parts –If indivisible, entire contract is tainted, and thus unenforceable –If the main purpose of the contract can be performed without enforcement of illegal section, contract is enforceable (but illegal provision is not)

15-7 Contracts to Commit Illegal Acts Agreements to Commit Crimes – illegalAgreements to Commit Crimes – illegal Agreements to Commit Torts – illegalAgreements to Commit Torts – illegal

15-8 Contracts Made Illegal by Statute Wagering Statutes – problem is to differentiate:Wagering Statutes – problem is to differentiate: –Wagering – straight gamble –Risk-shifting (ex. – insurance with insurable interest) –Speculative bargaining (ex. – futures contracts) Statutes Declaring Bargains Void/VoidableStatutes Declaring Bargains Void/Voidable –Usury –Sunday Blue Laws Regulatory StatutesRegulatory Statutes –Require licenses – protect the public – contracts not enforceable –Revenue-raising – no public protection, contracts enforceable

15-9 Contracts Made Illegal by Statute

15-10 Contracts Contrary to Public Policy Idea of Public Policy – what court believes is in best interests of societyIdea of Public Policy – what court believes is in best interests of society Contracts Injurious to Public Service – public interest served when public officials fully & faithfully perform dutiesContracts Injurious to Public Service – public interest served when public officials fully & faithfully perform duties Contracts to Influence Fiduciaries – fiduciary (person in position of trust/confidence) induced to breach fiduciary dutyContracts to Influence Fiduciaries – fiduciary (person in position of trust/confidence) induced to breach fiduciary duty Exculpatory Clauses – provision that attempts to relieve one party from liability – contracts with exculpatory clauses may be enforceable where no duty to public and both parties freely and knowingly agree (ex. – assumption of risk on ski tickets)Exculpatory Clauses – provision that attempts to relieve one party from liability – contracts with exculpatory clauses may be enforceable where no duty to public and both parties freely and knowingly agree (ex. – assumption of risk on ski tickets)

15-11 Contracts in Restraint of Trade – public interest best served by free competition, some situations where limiting competition justifiable, sole purpose or ancillaryContracts in Restraint of Trade – public interest best served by free competition, some situations where limiting competition justifiable, sole purpose or ancillary Unequal BargainsUnequal Bargains –Doctrine of freedom of contract –Unconscionable contracts –Contracts of adhesion Code and Unconscionable Contracts – unconscionable not defined – courts less likely to find contracts between merchants unconscionableCode and Unconscionable Contracts – unconscionable not defined – courts less likely to find contracts between merchants unconscionable Contracts Contrary to Public Policy (contd)

15-12 Common Contracts Contrary to Public Public Policy