CHAPTER 13 LEGALITY OF SUBJECT MATTER AND PROPER FORM OF CONTRACTS DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 2 REQUIREMENTS OF LEGALITY OF SUBJECT MATTER AND PROPER FORM Subject matter and purpose of the contract must be legal at the time the contract is entered into to be valid. If not contract is void and unenforceable. Legality under the Statute of Frauds. Subject matter and purpose of the contract must be legal at the time the contract is entered into to be valid. If not contract is void and unenforceable. Legality under the Statute of Frauds.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 3 Components of Illegality. – Bargain is illegal if its performance is criminal, tortious, or otherwise opposed to public policy. – Both subject matter and realization of its objectives must be permissible under state and federal statutes. Components of Illegality. – Bargain is illegal if its performance is criminal, tortious, or otherwise opposed to public policy. – Both subject matter and realization of its objectives must be permissible under state and federal statutes. REQUIREMENTS OF LEGALITY OF SUBJECT MATTER AND PROPER FORM

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 4 MALA IN SE AND MALA PROHIBITA BARGAINS Court distinguish between mala in se and mala prohibita. – Mala in se: bargains that violate statutes because they are evil in themselves. – Mala prohibita: bargains that have been merely forbidden by statute. Court distinguish between mala in se and mala prohibita. – Mala in se: bargains that violate statutes because they are evil in themselves. – Mala prohibita: bargains that have been merely forbidden by statute.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 5 AGREEMENTS THAT VIOLATE STATUTES Price-Fixing Agreements: generally to restrain competition so as to create a monopoly or oligopoly in order to control price fluctuations. Performance of Services Without a License: absence of license bargain is unenforceable. License is to protect public from unqualified persons. Price-Fixing Agreements: generally to restrain competition so as to create a monopoly or oligopoly in order to control price fluctuations. Performance of Services Without a License: absence of license bargain is unenforceable. License is to protect public from unqualified persons.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 6 Sunday Closing Laws: prohibit the formation or performance of contracts on Sundays. Wagering Statutes: wagering contracts and lotteries are illegal because of statutes prohibiting gambling, betting and other games of chance. Illegal wager if activity involves a person’s paying consideration or value in the hope of receiving a prize or other property by chance. Legal if consists of a scheme involving artificial creation of risk. Sunday Closing Laws: prohibit the formation or performance of contracts on Sundays. Wagering Statutes: wagering contracts and lotteries are illegal because of statutes prohibiting gambling, betting and other games of chance. Illegal wager if activity involves a person’s paying consideration or value in the hope of receiving a prize or other property by chance. Legal if consists of a scheme involving artificial creation of risk. AGREEMENTS THAT VIOLATE STATUTES

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 7 Usury Statutes: loaning money at a greater profit (or interest rate) than the law permits. Usury to exist, there must be a loan of money for which the debtor agrees to repay the principal at a rate that exceeds the legal rate of interest. AGREEMENTS THAT VIOLATE STATUTES

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 8 Covenant Not to Compete: also called restrictive covenants, express promises that a seller of a business or an employee who leaves a company will not engage in the same or similar business or occupation for a period of time in a certain geographic area. AGREEMENTS THAT VIOLATE STATUTES

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 9 Exculpatory Clauses: legality of bargains made in which a person agrees in advance to exonerate another person’s activities from liability, can be legal or illegal. AGREEMENTS THAT VIOLATE STATUTES

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 10 EXCEPTIONS: UPHOLDING ILLEGAL AGREEMENTS Parties Not in Pari Delicto: parties not equally at fault. Repentance: parties try and undo or rescind illegal agreement before consummation. Partial Illegality: unenforceable parts of the bargain that are illegal. Parties Not in Pari Delicto: parties not equally at fault. Repentance: parties try and undo or rescind illegal agreement before consummation. Partial Illegality: unenforceable parts of the bargain that are illegal.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 11 THE IMPORTANCE OF FORM The law places certain requirements on the form of contracts: agreement (offer and acceptance), consideration, capacity, reality of consent, and legality. The law also places certain limitations on the interpretation of what is meant by contract language. The law places certain requirements on the form of contracts: agreement (offer and acceptance), consideration, capacity, reality of consent, and legality. The law also places certain limitations on the interpretation of what is meant by contract language.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 12 THE IMPORTANCE OF FORM Requiring contracts to be in writing to be enforced by the law. Writing is evidence that contract was formed and avoids perjury. Requiring contracts to be in writing to be enforced by the law. Writing is evidence that contract was formed and avoids perjury.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 13 STATUTE OF FRAUDS Requires certain types of contracts to be in writing to be enforceable. Valid contract exists. Affirmative defense: defense to a cause of action that the defendant must raise. Used by a person who wants to avoid the enforcement of a contract. Requires certain types of contracts to be in writing to be enforceable. Valid contract exists. Affirmative defense: defense to a cause of action that the defendant must raise. Used by a person who wants to avoid the enforcement of a contract.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 14 STATUTE OF FRAUDS Types of Contracts. – Contracts answering for the debts of others if person defaults. – Contracts for interests in land. – Contracts not to be performed within one year of their making. Types of Contracts. – Contracts answering for the debts of others if person defaults. – Contracts for interests in land. – Contracts not to be performed within one year of their making.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 15 STATUTE OF FRAUDS Types of Contracts: – Promises of executors and administrators of estates. – Contracts made in consideration of marriage. – Contracts for sale of goods priced at $500 or more or the lease of goods for $1,000 or more. Types of Contracts: – Promises of executors and administrators of estates. – Contracts made in consideration of marriage. – Contracts for sale of goods priced at $500 or more or the lease of goods for $1,000 or more.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 16 STATUTE OF FRAUDS Writing: may take the form of letters, telegrams, receipts or memoranda. And must identify the parties to the agreement, the subject matter of the agreement, and all material terms and conditions. Signature: parties written signatures, also may include, stamped signatures or stationery letterheads. Writing: may take the form of letters, telegrams, receipts or memoranda. And must identify the parties to the agreement, the subject matter of the agreement, and all material terms and conditions. Signature: parties written signatures, also may include, stamped signatures or stationery letterheads.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 17 PAROL EVIDENCE RULE Law predicates that oral evidence should not be admissible to alter, add to, or vary the terms of an integrated, written contract. Facilitates judicial interpretation by having a single, clear source of proof as to the terms of the agreement between the parties. Emphasizes the importance of writings. Rule of Substantive Law. Law predicates that oral evidence should not be admissible to alter, add to, or vary the terms of an integrated, written contract. Facilitates judicial interpretation by having a single, clear source of proof as to the terms of the agreement between the parties. Emphasizes the importance of writings. Rule of Substantive Law.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 18 EXCEPTIONS TO THE PAROL EVIDENCE RULE Partially Integrated Contracts. – Writing is an incomplete statement of the contract. Mistake, Fraud, and Other “Reality-of- Consent” Situations. – Casts doubts on the validity of the integrated writing. Partially Integrated Contracts. – Writing is an incomplete statement of the contract. Mistake, Fraud, and Other “Reality-of- Consent” Situations. – Casts doubts on the validity of the integrated writing.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 19 EXCEPTIONS TO THE PAROL EVIDENCE RULE Ambiguities and Conditions Precedent. – To clear up ambiguities and show an agreement was not binding on parties until condition precedent. Uniform Commercial Code. – Evidence of course dealing, usage of trade, and course of performance is admissible. Ambiguities and Conditions Precedent. – To clear up ambiguities and show an agreement was not binding on parties until condition precedent. Uniform Commercial Code. – Evidence of course dealing, usage of trade, and course of performance is admissible.