Legal Purpose CHAPTER TEN

10 | 2 Copyright © Houghton Mifflin Company. All rights reserved. The Effect of Illegal Agreements What happens when the goal of a contract is illegal? Generally, the contract is void, or the courts will leave the parties as it found them. There are exceptions to the general rule: –When the parties are not in equal fault, the court may enforce the contract if doing so serves some public interest. –Where one party to the contract is ignorant of the illegality, the contract may be enforced. A contract to ship 100 pounds of drugs may be enforceable as long as the delivery company was not aware of the actual nature of the cargo. –Some states allow those who suffer large gambling loses to recover money lost from the winner.

10 | 3 Copyright © Houghton Mifflin Company. All rights reserved. Agreements That Violate Civil and Criminal Statutes Agreements that require one party to commit a tort or a crime are illegal and are void. Murder, assault, selling drugs, and so on are examples of acts that are crimes and contracts in these areas will not be enforced by the courts.

10 | 4 Copyright © Houghton Mifflin Company. All rights reserved. Agreements That Violate Licensing Statutes As a general rule, a contract with a person performing a service that requires a license will not be enforced if the person does not have the required license. Licenses come in two types: –One is to raise revenue for the government. –One is to ensure to the public some minimum level of skill has been demonstrated to obtain the license. It is the license where a minimum skill level has been demonstrated to obtain the license that will raise concern in contract cases.

10 | 5 Copyright © Houghton Mifflin Company. All rights reserved. Licensing Statutes For licenses intended to raise revenue (e.g., a fishing license):  The purpose of the licenses is to raise revenue to fund various conservation programs.  The fisherman can be held accountable for violating the requirement of having a license. For licenses that ensure to the public some special skill has been acquired (e.g., doctor, lawyer, C.P.A., etc.): These types of service contracts will need a license to be enforceable.

10 | 6 Copyright © Houghton Mifflin Company. All rights reserved. Agreements That Violate Gambling Statutes Gambling contracts: contracts to purchase the right to participate in a game of chance where one could win money or prizes Generally gambling is illegal. Many states and charities use gambling to help raise revenue. These forms of gambling are often legal: – Lottery: state and multi-state lottery games – Bingo/Monte Carlo nights – Horse betting and off-track betting – Participating in gaming at a legal casino

10 | 7 Copyright © Houghton Mifflin Company. All rights reserved. Online Gaming With the advent of the Internet, online gaming is developing as people open offshore (outside of the United States) online casinos. Many states and the federal government are examining methods to restrict this type of gambling. Legislation is currently before Congress to prohibit U.S. financial institutions to facilitate in any manner online gaming transactions.

10 | 8 Copyright © Houghton Mifflin Company. All rights reserved. Usury Generally, each state sets a maximum amount of interest that can be charged on loan contracts in the state. States do this to protect borrowers from paying excessive rates of interest. The borrower and lender cannot agree to a rate higher than the maximum rate set by state statute. Civil penalties for violating usury statutes can include: – Forfeiting excess interest on the loan – Forfeiting all interest on the loan – Forfeiting principal and interest on the loan – Recovery of double or triple the amount of interest on the loan (in some states) There does appear to be a trend toward relaxing the impact of usury statutes to help facilitate business.

10 | 9 Copyright © Houghton Mifflin Company. All rights reserved. Sunday/Sabbath Laws Many states had laws that prohibited enforcing contracts that were formed on a Sunday or the Sabbath. Many states have changed their statutes through legislative action and court decisions so that now a contract formed on a Sunday or the Sabbath will be enforced like any other. Other states will give force and effect to the contract as long it is ratified on a regular business day. Complete performance by one party or the other also acts as ratification of the agreement.

10 | 10 Copyright © Houghton Mifflin Company. All rights reserved. Agreements Opposed to Public Policy Public Policy: a concept used by the courts, where cases are decided based upon what is in the greatest public interest For example, an agreement that would harm the institution of marriage generally will not be enforceable. – Most courts follow the public policy of deciding cases in a manner that promotes the institution of marriage.

10 | 11 Copyright © Houghton Mifflin Company. All rights reserved. Agreements Opposed to Public Policy (continued) Exculpatory Clauses An exculpatory clause is a term or provision placed in a contract to limit the liability of one party for any damages or injury. Because these clauses attempt to limit liability for careless or wrongful behavior, courts view them skeptically and tend to decide whether to enforce them on a case-by-case basis. Courts often will not enforce an exculpatory clause where it is offered on a take-it-or-leave-it basis. – When a person is in a superior bargaining position and offers a contract on a take-it-or-leave-it basis, it is referred to as an adhesion contract.

10 | 12 Copyright © Houghton Mifflin Company. All rights reserved. Agreements Opposed to Public Policy (continued) Exculpatory Clauses (continued) Exercise caution with exculpatory clauses, because not all are considered to violate public policy and some will be enforced. The enforceable exculpatory clause must state the limitation of liability: – In a manner where the limitation is narrow in its scope, and – Clearly and conspicuously in the contract. The clause cannot be hidden in the “fine print.”

10 | 13 Copyright © Houghton Mifflin Company. All rights reserved. Agreements Opposed to Public Policy (continued) Agreements that interfere with the administration of justice: – An agreement which would interfere with the proper administration of justice will not be enforced. An agreement to pay a witness not to testify will not be enforced. Agreements that interfere with the performance of a public duty will not be enforced. –An agreement to bribe a judge, police officer, or legislator is not enforceable.

10 | 14 Copyright © Houghton Mifflin Company. All rights reserved. Agreements to Restrain Trade A contract that restrains trade is one that would impede free and open competition. As a general rule, contracts that restrain trade will not be enforced. Free and open competition is essential to the smooth operation of the economic system in the United States.

10 | 15 Copyright © Houghton Mifflin Company. All rights reserved. Agreements to Restrain Trade (continued) The exception to the general rule on contracts that restrain trade is the covenant not to compete. A covenant not to compete can be enforced in certain situations. –In an employment contract, a promise is included which prohibits the employee from competing with the employer. –In a contract to sell an ongoing business, a promise is included which prohibits the party selling the business from competing with the party purchasing the business.

10 | 16 Copyright © Houghton Mifflin Company. All rights reserved. Agreements to Restrain Trade (continued) A covenant not to compete will be enforced as long as: –The area where competition is restricted is no larger than needed to protect the interests of an employer or purchaser of a business –The time is reasonable in relation to the agreement in question Courts often look at these issues on a case-by-case basis, and courts will sometimes redraw the area or reset the time to allow the agreement to be enforced.

10 | 17 Copyright © Houghton Mifflin Company. All rights reserved. Agreements to Restrain Trade (continued) Employers are increasingly asking all employees to sign non-compete agreements. As long as they are reasonable in area and time, courts will enforce these agreements. However, some states believe these agreements may be too restrictive and limit the enforcement of employees’ covenants not to compete.

10 | 18 Copyright © Houghton Mifflin Company. All rights reserved. Agreements That Limit Competition A monopoly exists when one company is essentially the only provider of a good or service. An agreement to create a monopoly is against public policy and is prevented by several federal and state statutes. Some natural monopolies are allowed to exist. Power, gas, and telephone companies have long been considered natural monopolies. However, these monopolies are heavily regulated by the states to ensure consumers will get the service at a fair price.

10 | 19 Copyright © Houghton Mifflin Company. All rights reserved. Unconscionable Contracts These include contracts with provisions that are overreaching, oppressive, or shock the conscience of the court. Unconscionable contracts normally arise in two situations: – One side has vastly superior bargaining power and abuses that power in its contracts, or – The deal shocks the conscience of the court (for example, contracts with those who do not speak English and do not understand what they’re signing).