Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning Chapter 16 Contracts: Legality and Public Policy Twomey Jennings Anderson’s Business Law and the Legal Environment, Comprehensive 20e Anderson’s Business Law and the Legal Environment, Standard 20e Business Law: Principles for Today’s Commercial Environment 2e

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 2 Effect of Illegality 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 3 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 4 Exceptions to Illegality Protection of One Party. Unequal Guilt.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 5 Good Faith and Fairness Good Faith and Fairness. –Every contract has an implied duty of good faith and fair dealing.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 6 Unconscionable Clauses What constitutes unconscionability? Procedural unconscionability. Contracts of Adhesion. Substantive unconscionability.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 7 Protectio n of One Party Unequal Guilt Knowledg e 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. Exceptions to Effect of Illegality

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 8 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 9 Prejudice to Public Policy Illegal Wagers and Lotteries Evasions of Statutory Protection Injuries to Public Service Illegal Lobbying Conflicts of Interests Obstructions to Legal Process Illegal Discrimination Agreements Negatively Affecting Society Agreements Affecting Public Welfare

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 10 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 11 Examples of Illegal Agreements Agreements obstructing legal process, such as an agreement with a witness to disappear. Illegal discrimination contracts. Wagers and private lotteries.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 12 Contracts with Unlicensed Persons in Licensed Callings or Dealings Fraudulent Sales Agreements Restraining Trade Agreements Not to Compete Conflicts of Interests Obstructions to Legal Process Usurious Agreements Agreements Impacting Business Regulation of Business

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 13 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 14 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.