Chapter 13 10/10/08 12:43 AM

Illegal Bargains A legal objective is essential for a promise or agreement to be binding When the formation or performance of an agreement is criminal,

tortuous, or otherwise contrary to public policy, the agreement is illegal and unenforceable.

The illegal bargain is made unenforceableo To discourage such undesirable conduct in the futureo And to avoid the inappropriate use of the judicial process in

carrying out the socially undesirable bargainViolations of Statutes

The courts will not enforce an agreement declared illegal by statute An agreement induced by criminal conduct will also not be enforced Licensing Statutes

o If the statute is regulatory, a person cannot recover for professional services unless he has the required license as long as the public policy behind the regulatory purpose clearly outweighs the person’s interest in being paid for his services

A regulatory license is a measure designed to protect the public from unqualified practitioners

Ex. Licenses issued under statutes prescribing standards for those who seek to practice law or medicine or engage in the construction business (Pacific Custom V. Turner)

o If the law is for revenue purposes only, agreements for unlicensed services are enforceable

A revenue license does not seek to protect against incompetent or unqualified practitioners but serves simply to raise money

Ex. A statute requiring a license of plumbers but not establishing standards of competence for those who practice the trade

Gambling Statuteso All states have legislation on gambling or wagering, and US courts

generally refuse to recognize the enforceability of a gambling agreement

o However, some states now permit regulated gambling (state lottery) to be enforceable

Usury Statuteso A usury statute is a law establishing a maximum rate of

permissible interest for which a lender and borrower of money may contract

o A usurious transaction involves a loan of money for which the interest rate is exacted in excess of the interest rate allowed by law in that jurisdiction

o Necessary loaner expenses (ex. Price to examine credit) are not included in considering the interest rate, however payments of which the lender derives an advantage are considered if they exceed reasonable value.

o The legal effect of usurious loans could be a forfeit of principal and interest, just interest, or only a portion of interest exceeding usury statute limit.

Violations of Public Policy Contract raising questions of public policy include

o Common law restraint of trade A restraint of trade is any contract or agreement that

eliminates or tends to eliminate competition or otherwise obstructs trade or commerce

Ex. Covenant not to compete, an agreement to refrain from entering into a competing trade, profession or business

Enforceable if The purpose of the restraint is to protect a property

interest of the promisee AND the restraint is no more extensive than is

reasonably necessary to protect that interest Usually occur in

Sale of a business Seller frequently promises not to compete in

that particular type of business in a defined area for a stated period of time in order to protect the business’s goodwill (an asset for the buyer)

Enforcement will be based on reasonability of restraint (geographic area it covers, the time period, and the hardship imposed on the promisor and public)

Employment Contracts Though the courts readily enforce a covenant

not to compete during the period of employment, they subject the promise after termination to a test of reasonableness

The employer must demonstrate that the restriction is necessary to protect his legitimate interest

Some courts, rather than refusing to enforce an unreasonable restraint, will modify the restrictive covenant to make it reasonable under circumstances

Exculpatory Clauseso Excuse one party from liability for her own tortuous conduct

Ex. On a parking lot claim check, which attempts to relieve the parking lot operator of liability for negligently damaging a vehicle, will generally be held unenforceable as against public policy

o Where one party’s superior bargaining position has enabled him to impose an exculpatory clause upon the other party, the courts are inclined to nullify the provision (Anderson V. McOskar)

Unconscionable Contractso The UCC provides that a court may scrutinize every contract for

the sale of goods to determine whether in its commercial setting, purpose and effect the contract is unconscionable, or unfair.

o The doctrine of unconscionability includes Procedural unconscionability

Scrutiny for the presence of “bargaining naughtiness” Was the negotiation process fair?

Ex. Burying important terms of the agreement in fine print, or obscuring true meaning of the contract with legal jargon.

Substantive unconscionability Courts examine the actual terms of a contract for

oppressive or grossly unfair provisions Ex. exorbitant prices or unfair exclusions or

limitations of contractual remedies Ex. A buyer in pressing need who is an unequal

bargaining position with a seller who consequently obtains an exorbitant price for his product or service.

o Adhesion contracts A standard form contract prepared by one party, generally

involves the preparer offering the other party the contract on a “take-it-or-leave-it” basis

such contracts are not automatically unenforceable but are subject to greater scrutiny for procedural or substantive unconscionability.

Tortious Conducto An agreement that requires a person to commit a tort is an illegal

agreement and thus unenforceable. Corrupting Public Officials

o Agreements that may adversely affect the public interest through the corruption of public officials or the impairment of the legislative process are unenforceable

Ex. A bargain by a candidate for public office to make a certain appointment following his election is illegal.

Effect of Illegality Illegal contract are unenforceable with few exceptions

o Party withdrawing before performance

A party to an illegal agreement may, before performance, withdraw from the transaction and recover whatever she has contributed, if the party has not engaged in serious misconduct

o Party protected by statute sometimes an agreement is illegal because it violates a

statute designed to protect persons from the effects of the prohibited agreement

o Party Not Equally at Faulto Excusable Ignoranceo Partial Illegality

Pacific Custom Pools V. Turner Construction Company PCP performed work from April 1995 to June 1996 to install all water

treatment for a ride Turner Construction was building at Universal. PCPs license was under suspension from Oct. 1995-March 1996, and PCP’s license had expired as of Jan 1996, and was not renewed until May 1996. PCP was paid $897,719 of the original $959,131 contract price. PCP brought suit against Universal and Turner for the remainder of the contract price. Trial court dismissed the suit under summary judgment that PCP has not been licensed in CA and thus could not bring suit. PCP appealed. Summary judgment in favor of defendants affirmed. Interpretation: A regulatory license is a measure to protect the public from unqualified practitioners; the failure to comply with such a regulation prevents the noncomplying party from recovering for services rendered.

Dunnam V. Burns Dunnam and friend borrowed $35,000 from Burns and agreed to repay

principle plue $5,000 six months later. After Dunnam defaulted on loan, Burns sued to recover. Dunnam defended by claiming the loan was usurious. The trial court ruled in favor of the plaintiff and the defendant appealed. Trial court ruled in judgment for defendant. Interpretation: Usury statutes establish a maximum rate of interest for which a lender may charge a borrower.

Anderson V. McOskar Enterprises, Inc

Anderson joined Curves fitness, and signed agreement and release of liability. The first paragraph purported to release Curves from liability for injuries Anderson might sustain, the second paragraph provided for Anderson’s acknowledgement that fitness activities “involve risk of injury” and agreement to “expressly assume and accept any and all risks of injury or death”. After beginning a workout, Anderson complained of pains in her head to her trainer, who advised her it was nothing serious, due to use of new muscles. She completed her workout and two months later underwent a cervical diskectomy. She then filed suit for damages, alleging Curves had been negligent in its acts or omissions during her workout. Curves moved for summary judgment on the ground that Anderson had released the club from liability for negligence. The district court granted summary judgment. Anderson appealed, appellate court affirmed summary judgment decision. Interpretation: An exculpatory clause is valid if it is limited in scope, not ambiguous, and not contrary to public policy.

Wiliams V. Walker-Thomas Furniture Co. Between 1957 and 1962 Williams purchased items on credit from Walker-

Thomas. W-T retained the right in its contract to repossess an item if Williams defaulted on an installment payment. Each contract provided that each installment would be credited pro rata to all outstanding accounts of bills owed to W_T. As a result, an unpaid balance would remain on every item purchased until the entire balance due on all items, whenever purchased, was paid in full. Williams defaulted on payment for an item in 1962 and W-T sought to repossess all items purchased since 1957. Williams claimed contracts were unconscionable and therefore unenforceable. Trial court granted judgment for W-T, District of Columbia Court of Appeals affirmed, Williams appealed to US court of appeals. Judgment was reversed and remanded to determine the possible unconscionability of the contracts. Interpretation: The doctrine of unconscionability includes both procedural and substantive unconscionability.

10/10/08 12:43 AM

10/10/08 12:43 AM