Chapter 9 Unlawful Agreements and the Statute of Frauds

I. Unlawful Agreements

An Unlawful Agreement is one that is: 1. Contrary to an expressed provision of law; 2. Contrary to the policy of expressed law, though not expressly prohibited; or, 3. Otherwise contrary to good morals [CC§ 1667]

PUBLIC POLICY means the common views about what is best for the public welfare If the object of the contract is unlawful, the contract is void (technically, since the object is unlawful, there is no contract) [CC§ 1598] Equal guilt in a contract is referred to as in “pari delicto.” Although there may be a technical difference, we will consider the term “unlawful” and “illegal” to be synonymous

II. Wagers Gambling Lotteries

A. Gambling The general rule is that a court will not recognize a gambling contract and will not aid the parties, but will leave the parties in the position where it finds them Each state’s legislature has the discretion to determine which laws are passed, including certain types of gambling. For example, certain types of gambling are legal in Nevada, but NOT in California.

B. Lotteries A LOTTERY involves three elements: the payment of valuable consideration, for the chance, of winning a prize. When does a raffle become a lottery? If there is: 1. a prize 2. chance, and 3. consideration

III. Usury Loan or Forbearance The Credit Sale Penalties For Usurious Rate Criminal Penalties

A. Loan or Forbearance A forbearance occurs when a person’s debt has become due and the creditor agrees to wait for payment beyond the due date, with the debtor and creditor agreeing that the debtor will pay interest for the period of time the creditor waits If the amount was not agreed to, it is 7%. The parties can agree in writing to a higher rate, but how much higher?

2 Classes of Loans The first class contains loans primarily for personal, family or household purposes referred to as CONSUMER LOANS NON-CONSUMER LOANS are the second classification for loans for all purposes other than consumer transactions The state of California has determined what is a fair rate of return on a loan of money, and any amount over this fair rate of return would be considered unfair and unlawful (USURY)

B. The Credit Sale When a buyer finances the purchase of real property or personal property by making payments, this credit sale is not a loan of money or a forbearance of money and the usury law does not apply

C.Penalties For A Usurious Rate If a loan is usurious, the lender usually has the right to collect the principal amount of the loan but is NOT allowed to collect the interest In a loan containing a usurious rate of interest, the payment of interest is “null and void” [Civil Code Section ] If the usurious interest rate has been collected by the lenders, the borrower may recover three times the amount of the usurious interest paid within the previous year [CC§ (a)] The Statute of Limitations to recover the triple interest paid requires an action be brought within one year from the date of payment of the usurious interest

D. Criminal Penalties If a lender willfully received usurious interest, it would be guilty of loan sharking, which is a felony punishable by imprisonment in state prison for not more than 5 years, or in the county jail for not more than 1 year [CC§ (b)]

IV. Promises Not To Compete

Promises Not To Compete “Promises NOT to compete” by employees are not looked upon favorably in California “Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void” [Bus. & Prof. C.§ 16600] TERRITORIAL RESTRICTION TIME RESTRCTION TRADE SECRET

V. Licensing Statutes

A. Business or Regulatory License 1. BUSINESS LICENSE is a tax on businesses at that location designed to raise public revenue 2. REGULATORY LICENSE is designed to protect the public from unqualified or incompetent individuals Real estate brokers Contractors Architects Accountants Cosmetologists

VI. Exculpatory Agreements Releases

Exculpatory Agreements are used when one party to a contract does not wish to shoulder certain risks inherent in the subject matter of the contract and desires to shift those risks to the other contracting party If a business is involved in serving the public interest, that business will not be allowed to enforce an exculpatory agreement with members of the public

VII.When Contracts Have to Be in Writing: The Statute of Frauds

Statute of Frauds The purpose of which is to insure that a fraud will not be committed on the court by having either a plaintiff or defendant lie about the existence or nonexistence of a contract and dupe the court into believing their position The Statute of Frauds is always used as an AFFIRMATIVE DEFENSE by the defendant

A.Performance Longer Than 1 year “An agreement that by its terms is not to be performed within 1 year from the making thereof” is required by the statute of frauds to be in writing and signed by the defendant in order to be enforced in court [CC§ 1624 (a)]

B. Promise to Pay the Debt of Another “A special promise to answer for the debt, default, or miscarriage of another,…” with few exceptions must be in writing and signed to be enforceable in court [ CC§ 1624 (b)] MAIN PURPOSE RULE

C. Real Estate Transactions Contracts for the sale of real property, or an interest therein, as well as leases over one year, must be in a signed writing to be enforced in court [CC§ 1624 (a)(3), CCP§ 1971] An INTEREST THEREIN includes easements or restrictions on the use of the land, and agreements for gas, oil, or mineral leases

D. Real Estate Agent’s Commission Employment of a real estate broker to purchase or sell real estate or lease real estate for a period longer than one year must be in a signed writing for the broker to get paid [CC§ 1624 (a)(4)]

E. Performance Beyond a Lifetime A writing is also required for “an agreement that by its terms is not to be performed during the lifetime of the promisor” [CC§ 1624 (a)(5)]

F. Assumption of A Debt on Real Property An agreement by a purchaser of real property to pay an indebtedness secured by the property purchased must be in writing to be enforced [CC§ 1624 (a)(6)]

G. Loans Greater than $100,000 Loans greater than $100,000 not primarily for personal, family, or household purposes, come under the writing requirement of the statute of frauds if made by a lender in the credit business [CC§ 1624 (a)(7)]

H. When the Statute of Frauds is NOT Applicable 1.Full Performance 2.Part Performance 3.Promissory Estoppel 4.Defendant Admits

I. Sufficiency of the Writing The minimum requirements for the writing: Identification of each party Reasonable identification of the subject matter Essential terms and conditions of each party’s performance obligation Signature of each party Technically, it is not necessary that the writing be signed by the plaintiff

J. Sale of Goods “A contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought…” [UCC§ 2201(1)] Exceptions: 1. Confirmation Letter 2. Specially Manufactured Goods 3. Part Performance 4. Admission

K. Probate Payments A personal representative’s promise to pay a debt of a decedent out of the representative’s own funds is unenforceable unless it is in writing and signed by the representative [Probate C.§ 9604]

L. Marriage Agreements “A premarital agreement shall be in writing and signed by both parties. It is enforceable without consideration” [Family C.§ 1611]

Chapter Summary Unlawful Agreements Wagers Gambling Lotteries Usury Loan or Forbearance The Credit Sale Penalties for Usurious Rate Criminal Penalties Promises Not To Compete Licensing Statutes Business or Regulatory Licenses Exculpatory Agreements Exculpatory Agreements When Contracts Have to Be in Writing: The Statute of Frauds Performance more 1yr Promise to pay debt of another Real estate transactions Real estate agent’s compensation Performance beyond lifetime Assumption of a debt on real property Loans greater than $100,000 When Statute of Frauds doesn’t apply Sufficiency of the writing Sale of goods Probate payments Marriage agreements