legal purpose chapter ten. 10 | 2 copyright © houghton mifflin company. all rights reserved. the...

Legal Purpose

CHAPTERTEN

10 | 2Copyright © 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.


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.


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.


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.


Agreements That ViolateGambling 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


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.


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.


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.


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.


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.



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.”



• 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.


Agreements toRestrain 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.


Agreements toRestrain 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.



• 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.



• 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.


Agreements ThatLimit 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.


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).

legal purpose chapter ten. 10 | 2 copyright © houghton mifflin company. all rights reserved. the...

Documents