Legality For a contract to be enforceable, it must be formed for a legal purpose. A specific clause in contract can be illegal, but rest of contract can be enforceable. A contract to commit a tortious act is illegal (see Chapter 4).

Legality Contracts Contrary to Statute. Contracts to do something prohibited by federal or state statutory law is illegal and therefore void (never existed). Usury.

Legality Contracts Contrary to Statute. Gambling. Distribution of property based on chance among persons who have paid valuable consideration. Online Gambling: Unlawful Internet Gambling Enforcement Act (2006) bars electronic payments, allows civil forfeiture.

Legality Contracts Contrary to Statute. Licensing Statutes. Contract’s enforceability depends on purpose. CASE 8.1 Sturdza v. United Arab Emirates (2011). What could Sturdza have done to protect herself contractually?

Legality Contracts Contrary to Public Policy. Contracts contrary to public policy are void. Contracts in Restraint of Trade are generally void. Exceptions: Covenant not to Compete and Sale of an Ongoing Business. 

Legality Contracts Contrary to Public Policy. Contracts in Restraint of Trade. Exceptions: Covenant not to Compete in Employment is enforceable as long as time and geographic terms are reasonable. CASE 8.2 Comedy Club, Inc. v. Improv West Associates (2009). What factors did the court consider?

Legality Contracts Contrary to Public Policy. Unconscionable Contracts or Clauses. Procedural Unconscionability: inconspicuous print or legalese. Depends on a party’s lack of knowledge or expertise.

Legality Contracts Contrary to Public Policy. Unconscionable Contracts or Clauses. Substantive Unconscionability: contracts are oppressive or overly harsh; that deny a remedy for nonperformance.

Legality Contracts Contrary to Public Policy. Exculpatory Clauses. Release a party from liability in the event of monetary or physical injury – no matter who is at fault. Enforceable when they are not against public policy, are not ambiguous, and do not shield parties from intentional conduct.

Unconscionability

Legality Generally, illegal contracts are void. If contract is executory, cannot be enforced. Unjust enrichment is not an issue.

Legality Generally, neither party can recover unless: (1) Justifiable Ignorance of the Facts. Relatively innocent party can recover some of the benefit.

Legality Generally, neither party can recover unless: (2) Members of Protected Classes. If contract references a certain group of people (e.g., airline pilots) a member of that group can enforce the illegal contract even though the other party cannot.

Legality Generally, neither party can recover unless: (3) Withdrawal from an Illegal Agreement. If the illegal part of a bargain has not been performed, the party rendering performance can withdraw from the contract and recover the performance or its value.

Legality Generally, neither party can recover unless: (4) Severable, or Divisible, Contracts. Contract that consists of independent performance clauses with separate consideration. If contract contains both illegal and legal performance, courts will enforce the contract as long as illegal parts do not materially impact the contract.

Legality Generally, neither party can recover unless: (5) Fraud, Duress, or Undue Influence. When a party has been wrongfully induced to enter into a contract by the other party, the innocent party will be allowed to recover for performance or its value.