CHAPTER 9 LEGALITYLEGALITY. Nature and Consequences of Legality Even if a contract has all the other elements that make up a valid contract, it may

CHAPTER 9CHAPTER 9CHAPTER 9CHAPTER 9

LEGALITYLEGALITYLEGALITYLEGALITY

Nature and Consequences of Nature and Consequences of LegalityLegality

Nature and Consequences of Nature and Consequences of LegalityLegality

Even if a contract has all the other elements Even if a contract has all the other elements that make up a valid contract, it may still be that make up a valid contract, it may still be invalid if it lacks a legal purpose.invalid if it lacks a legal purpose. Violates Statutory LawViolates Statutory Law

Illegality of the action renders the contract voidIllegality of the action renders the contract void Parties would be subject to penalty specified under the Parties would be subject to penalty specified under the law(s) violatedlaw(s) violated

Conspiracy—individuals who agree to commit crimes for a promised Conspiracy—individuals who agree to commit crimes for a promised consideration consideration

If it is impossible to separate a contract into If it is impossible to separate a contract into separate parts and if any part of the contract separate parts and if any part of the contract is determined to is determined to

be illegal, none of the contract is valid.be illegal, none of the contract is valid. Even if some parts of the contract are legally Even if some parts of the contract are legally enforceableenforceable

Divisible ContractsDivisible ContractsDivisible ContractsDivisible Contracts

If certain promises and actions If certain promises and actions in a contract can be successfully in a contract can be successfully performed by themselves, then the performed by themselves, then the contract is said to be divisible.contract is said to be divisible.

The courts may enforce those The courts may enforce those parts that are legal and revoke parts that are legal and revoke the parts that are not.the parts that are not.

A furniture store required an unemployed woman on public A furniture store required an unemployed woman on public assistance to sign its standard contract for credit every assistance to sign its standard contract for credit every time she made a purchase at the store. One of the terms time she made a purchase at the store. One of the terms of the contract stated that the store would of the contract stated that the store would ownown every item every item she purchased untilshe purchased until all the items were fully paidall the items were fully paid. The . The woman made several purchases at the store, signing this woman made several purchases at the store, signing this same standard contract each time.same standard contract each time.

After After several yearsseveral years of making of making all of her paymentsall of her payments, she , she purchased a couch and purchased a couch and missed 2 paymentsmissed 2 payments. The store . The store believed it had the right, under the contract, to take believed it had the right, under the contract, to take back back all the itemsall the items the woman the woman ever purchasedever purchased there. there.Is she chained to the contract she signed?Is she chained to the contract she signed?

A court of appeals found a portion of the contract to be unconscionable and did not enforce this unfair term in the agreement. The woman had to return the couch, but she was able to keep all the items which had already been paid.

In Pari DelictoIn Pari DelictoIn Pari DelictoIn Pari Delicto

In Equal FaultIn Equal Fault Both parties knew the agreement was Both parties knew the agreement was illegalillegal

Neither side can sue for breach of Neither side can sue for breach of contractcontract

If one party is unaware the law is If one party is unaware the law is being broken and has no intent to being broken and has no intent to break the law, the courts may grant break the law, the courts may grant relief to the “innocent party”relief to the “innocent party”

Agreements That Violate Agreements That Violate StatutesStatutes

Agreements That Violate Agreements That Violate StatutesStatutes

State legislatures pass laws declaring State legislatures pass laws declaring that certain types of agreements are that certain types of agreements are illegal and void because they violate:illegal and void because they violate: Civil and criminal statutes—agreements that Civil and criminal statutes—agreements that require one party to commit a tort or a crimerequire one party to commit a tort or a crime

Tort—a private wrong committed against a person Tort—a private wrong committed against a person (Civil)(Civil)

Usury statutes—when a lender charges more than Usury statutes—when a lender charges more than the maximum legal interest rate allowed by the maximum legal interest rate allowed by state lawstate law

Interest Interest is the fee the borrower pays to the lender is the fee the borrower pays to the lender for using the money.for using the money.

Agreements That Violate Agreements That Violate Statutes: Statutes: Gambling Statutes Gambling Statutes Agreements That Violate Agreements That Violate

Statutes: Statutes: Gambling Statutes Gambling Statutes

Gambling agreements in which one Gambling agreements in which one party wins and another party loses, party wins and another party loses, even if some skill may be involved.even if some skill may be involved. IncludesIncludes

Playing cards for moneyPlaying cards for money Money wagers or bets on elections or Money wagers or bets on elections or sports eventssports events

Buying tickets in a sports poolBuying tickets in a sports pool Changes in State Laws:Changes in State Laws:

Betting at racetracksBetting at racetracks Certain forms of off-track bettingCertain forms of off-track betting State-run lotteries State-run lotteries

Agreements That Violate Agreements That Violate Statutes: Statutes: Gambling Statutes Gambling Statutes Agreements That Violate Agreements That Violate

Statutes: Statutes: Gambling Statutes Gambling Statutes

LotteryLottery A game that consists of drawing LotsA game that consists of drawing Lots

Tickets with different combinations of Tickets with different combinations of numbers printed on them where prizes are numbers printed on them where prizes are distributed to the winners from the pool distributed to the winners from the pool of persons buying a chance.of persons buying a chance.

Often, organizations who sell Often, organizations who sell gambling devices have to donate a gambling devices have to donate a percentage of the profits to percentage of the profits to charities charities VFW, EaglesVFW, Eagles

Agreements That Violate Agreements That Violate Statutes: Sunday StatutesStatutes: Sunday StatutesAgreements That Violate Agreements That Violate Statutes: Sunday StatutesStatutes: Sunday Statutes

In some states, it is illegal to In some states, it is illegal to make or perform contracts on make or perform contracts on Sunday.Sunday. Called Sunday statutes or blue Called Sunday statutes or blue laws.laws.

The statutes vary greatly from state to The statutes vary greatly from state to state.state.

Agreements That Violate Agreements That Violate Statutes: Licensing Statutes: Licensing

StatutesStatutes


StatutesStatutes A A licenselicense is a legal document stating is a legal document stating that the holder has permission from the that the holder has permission from the proper authorities to carry on a certain proper authorities to carry on a certain trade or profession.trade or profession. All states have statues that require persons All states have statues that require persons to have a license to practice certain trades to have a license to practice certain trades or professions and engaging in such a trade or professions and engaging in such a trade or profession without a license is illegal.or profession without a license is illegal.

Some licenses are designed to protect the public from Some licenses are designed to protect the public from dealing with unqualified persons.dealing with unqualified persons.

Some state statutes require licenses simply to raise Some state statutes require licenses simply to raise revenue.revenue.Name a profession that requires a

license.


StatutesStatutes


StatutesStatutes In most states the following In most states the following trade and professional workers trade and professional workers must be licensed. must be licensed. – Doctors/Nurses/Health Care WorkersDoctors/Nurses/Health Care Workers– Child Care WorkersChild Care Workers– SurveyorsSurveyors– Funeral directors Funeral directors – Barbers/HairdressersBarbers/Hairdressers– Plumbers/ElectriciansPlumbers/Electricians

Reviewing What You LearnedReviewing What You LearnedPage 193 Questions 1-4Page 193 Questions 1-4

Reviewing What You LearnedReviewing What You LearnedPage 193 Questions 1-4Page 193 Questions 1-4

1.1. What makes a contract illegal?What makes a contract illegal?Illegal contracts may be created in many ways. A contract may be illegal if it involves an agreement to do something that violates statutory law.

2.2. What are the consequences of illegality What are the consequences of illegality in relation to contract law?in relation to contract law?If the contract cannot be separated into isolated promises and acts that can be performed independently, the entire contract is rendered illegal. If any part of the agreement is illegal, a valid contract cannot result. If the contract is divisible the court may enforce the legal parts of the agreement and revoke the illegal parts.

3.3. What contracts are illegal by statutory What contracts are illegal by statutory law?law?Contracts that violate a state’s civil or criminal statutes, usury statutes, gambling statutes, licensing statutes, or Sunday statutes.

4.4. What are the different types of What are the different types of licenses?licenses?Some licenses raise revenue, other are designed to protect the public.

Illegal ContractsIllegal Contracts

violate statestatutes

• civil and criminal statutes• usury statutes• gambling statues• Sunday statutes• licensing statutes

• agreements that unreasonably restrain trade

• agreements to obstruct justice• agreements inducing breach of duty or fraud• agreements interfering

with marriage

Illegal contracts thatIllegal contracts that

violate publicpolicy

CHPATER 9CHPATER 9

Agreements Contrary to Agreements Contrary to Public PolicyPublic Policy


Public Policy is a time-honored legal Public Policy is a time-honored legal doctrine. The basis for making public doctrine. The basis for making public policy decisions is the underlying policy decisions is the underlying principle that nobody should get away principle that nobody should get away with doing something that harms the with doing something that harms the public at large.public at large. If an activity harms the health, safety, If an activity harms the health, safety, welfare, or morals of the public, that welfare, or morals of the public, that activity violates public policy.activity violates public policy.



Agreements that unreasonably Agreements that unreasonably restrain trade restrain trade Contracts not to competeContracts not to compete Price fixing agreementsPrice fixing agreements Agreements to defeat competitive biddingAgreements to defeat competitive bidding

More common agreements include: More common agreements include: Agreements to obstruct justiceAgreements to obstruct justice Agreements inducing breach of duty or Agreements inducing breach of duty or fraudfraud

Contracts interfering with marriage Contracts interfering with marriage

Agreements that Agreements that Unreasonably Restrain Trade Unreasonably Restrain Trade

Agreements that Agreements that Unreasonably Restrain Trade Unreasonably Restrain Trade

The law protects our rights to The law protects our rights to make a living and do business in a make a living and do business in a market economy.market economy.

A restraint of trade is a A restraint of trade is a limitation on the full exercise of limitation on the full exercise of doing business with others.doing business with others.

Three types of contracts that violate Three types of contracts that violate this rule: this rule: 1.1. Agreements not to competeAgreements not to compete2.2. Price fixingPrice fixing3.3. Agreements to defeat competitive bidding Agreements to defeat competitive bidding

Agreements that Agreements that Unreasonably Restrain Unreasonably Restrain

Trade Trade


Trade Trade

Agreements not to competeAgreements not to compete When a business owner sells a business, When a business owner sells a business,

sometimes the sales contract will include a sometimes the sales contract will include a provision called a provision called a restrictiverestrictive covenantcovenant, which , which is a promise not to compete.is a promise not to compete.

The seller of the business will not open a The seller of the business will not open a competing business within a certain area for competing business within a certain area for a period of time after the sale. a period of time after the sale. The court will uphold such a restriction if it is The court will uphold such a restriction if it is

reasonable in time and geographic location. reasonable in time and geographic location. Promises not to compete are also sometimes Promises not to compete are also sometimes

found in employment contracts. found in employment contracts. Such contracts are enforced only as necessary to Such contracts are enforced only as necessary to

protect the former employer from unfair protect the former employer from unfair competition.competition.


Trade Trade


Trade Trade

Price fixingPrice fixing occurs when competitors occurs when competitors agree on certain price ranges within agree on certain price ranges within which they set their prices. which they set their prices.

Price fixing discourages competition and Price fixing discourages competition and raises prices.raises prices.

Q:Q: Is the ever changing price of Is the ever changing price of gasoline at the pumps price gasoline at the pumps price fixing???fixing???


Trade Trade


Trade Trade Agreements to defeat competitive Agreements to defeat competitive

biddingbidding A bid is an offer to buy or sell goods or A bid is an offer to buy or sell goods or

services at a stated price. services at a stated price. Laws often require governments to construct Laws often require governments to construct

public works or buy goods and services through public works or buy goods and services through competitive biddingcompetitive bidding.. In the process of competitive bidding, rivals submit In the process of competitive bidding, rivals submit

bids for a project. The firm with the lowest bids for a project. The firm with the lowest qualified bid wins the contract.qualified bid wins the contract. If the bidders get together and agree not to bid If the bidders get together and agree not to bid

lower than a certain price, then they are not lower than a certain price, then they are not bidding fairly. These agreements and contracts bidding fairly. These agreements and contracts are not enforceable. are not enforceable.

Agreements that Agreements that Obstruct JusticeObstruct Justice Agreements that Agreements that Obstruct JusticeObstruct Justice

Any contract that interferes with Any contract that interferes with the administration of justice is the administration of justice is illegal. illegal.

Such agreements include: Such agreements include: Protecting someone from arrestProtecting someone from arrest Encouraging lawsuits Encouraging lawsuits Giving false testimonyGiving false testimony Bribing a jurorBribing a juror

Agreements Agreements Inducing Inducing Breach of Duty or FraudBreach of Duty or Fraud Agreements Agreements Inducing Inducing Breach of Duty or FraudBreach of Duty or Fraud

All congressional and state All congressional and state representatives and all other public representatives and all other public officials hold positions of trust. officials hold positions of trust. These officials owe a duty to work These officials owe a duty to work for the best interest of the public.for the best interest of the public.

Any contract that tries to influence the Any contract that tries to influence the representatives to use their positions representatives to use their positions for private gain is unenforceable. for private gain is unenforceable.

This rule also applies to private This rule also applies to private persons who are in positions of persons who are in positions of trust.trust.

Agreements Agreements Interfering with Marriage Interfering with Marriage

Agreements Agreements Interfering with Marriage Interfering with Marriage

The law encourages marriages and The law encourages marriages and protects family relationships. protects family relationships.

Contracts that discourage, harm, Contracts that discourage, harm, or interfere with good family or interfere with good family relationships are illegal and relationships are illegal and unenforceable in court.unenforceable in court.

For example, a contract promising money in For example, a contract promising money in exchange for not marrying would be void.exchange for not marrying would be void.

Reviewing What You LearnedPage 199 Questions 1-4

Reviewing What You LearnedPage 199 Questions 1-4

1. What is the legal doctrine of public policy?No one should be permitted to do anything that harms the public at large.

2. What contracts are considered to be agreements that are contrary to public policy?Agreements that involve an unreasonable restraint of trade, agreements to obstruct justice, agreements inducing fraud or breach of duty; and contracts interfering with marriage.

3. What types of contracts involve an unreasonable restraint of trade?Contracts not to compete, price fixing, and agreements to defeat competitive bidding.

4. What is a restrictive covenant?Agreement by the seller of a business not to open a competing business within a certain geographic area for a certain period of time.

Documents

CHAPTER 9 LEGALITYLEGALITY. Nature and Consequences of Legality Even if a contract has all the other elements that make up a valid contract, it may