CHAPTER 14

1. CHAPTER 14 Illegality

2. Types of Illegality • In either formation or performance • Contrary to public interest, policy or welfare or Violation of a Statute or of a rule of Common Law • Whitehead “Baby M” Case at beginning of the chapter • The court found the surrogacy contract to be against statutes prohibiting the use of money in connection with adoptions, statutes requiring proof of unfitness before termination of parental rights, and statutes allowing revocation of consent in private adoptions. The contract also violated the public good because it did not allow for the consideration of the best interests of the child in determining custody. Thus, the contract was declared illegal and unenforceable. Custody of the child was given to the father, however, based on the traditional custody doctrine of “the best interests of the child,” and Whitehead was given visiting rights. Usually when a contract is declared illegal, the parties are not given remedies. The Baby M case is unusual in that the court tried to work out the best remedies for all involved. These remedies were not contractually based, however. Some states have statutes specifically outlawing surrogacy contracts, the contract violates certain New Jersey adoption statutes, and it goes against public policy as determined by the judge.

3. Types of Illegality • In either formation or performance • Contrary to public interest, policy or welfare or Violation of a Statute or of a rule of Common Law • Question 6 at end of chapter • Yes. A parent cannot, by his own contract, relieve himself of the legal obligation to support his minor children. A parent has no right to contract away a child’s support benefits. Although the primary goal of a paternity action is to secure support and education for illegitimate children, a legitimate subsidiary goal of the same action is to protect the public interest by preventing the illegitimate child from becoming a ward to the state. Public policy considerations mandate that the state take an active interest in providing for the welfare of illegitimate children in order to avoid placing an undue burden on taxpayers. Straub v. B.M.T., 626 N.E.2d 848 (Ind. Ct. App. 1993).

4. Types of Illegality • In either formation or performance • Contrary to public interest, policy or welfare or Violation of a Statute or of a rule of Common Law • Question 11 at end of chapter • The agreement is in violation of public policy in several ways. First, the State should not be allowed to forbear the prosecution of a suspected criminal in return for a payoff. There is a great public interest in prosecuting drug offenders and ensuring that they receive fair and appropriate sentences for their crimes. Second, the State should not be allowed to use its greater bargaining power -- in this case, being in the position of being able to grant or deny a man's freedom and being in possession of the confiscated money -- for profit. It is improper to threaten a defendant in a civil forfeiture proceeding with criminal prosecution, which, effectively, is what occurred here. Finally, the State should not be allowed to effect a taking of personal property without any apparent basis. Citizens need to be secure in their knowledge that their property shall not be taken without cause and without due process. State of Alabama v. Cortner, 2004 Ala. Crim. App. LEXIS 119 (2004).

5. Types of Illegality • In either formation or performance • Contrary to public interest, policy or welfare or Violation of a Statute or of a rule of Common Law • FREY v. FREY 471 A.2d 705 (1984) • FACTS: Four days prior to their marriage, Barbara and Howard Frey signed an antenuptial agreement stating that each would retain sole ownership and control of all the individual property which they presently possessed or thereafter acquired, as if the marriage never occurred. It also provided for a release and waiver of any claim for alimony, support or maintenance. At that time, Barbara was 22 and a second grade teacher. Howard, 32, was established in business and had a substantially greater salary and bank account than Barbara. After 8 years of marriage, they were divorced. The circuit court declared the antenuptial agreement null and void as against public policy, and awarded Barbara alimony and child support for their three children. • ISSUE: Should the court recognize the legitimacy of antenuptial agreements in light of the change in public policy? (Cont.)

6. Types of Illegality • In either formation or performance • Contrary to public interest, policy or welfare or Violation of a Statute or of a rule of Common Law • FREY v. FREY 471 A.2d 705 (1984) (Cont.) • DECISION: When the rationales which give meaning to a judicially created rule are no longer vital, and the rule is not consonant with the needs of contemporary society, the court can change the rule. In the past we have held that an antenuptial agreement in anticipation of separation and divorce is void as against public policy because it facilitates separation or divorce, and could be used by a mercenary husband to inflict abuse upon his wife with the knowledge that his pecuniary liability would be limited. The state also had an interest in assuring that a wife was supported adequately if there was a divorce so that she would not become a ward of the state. • Since we last considered this policy, there has been a trend in other jurisdictions to recognize such agreements. There is little empirical evidence that such agreements encourage divorce. Further, the roles of husband and wife have changed, and marital roles are no longer rigidly defined. When the rule was established, the husband worked and brought income into the family while the wife maintained and managed the household. Married women nowadays are increasingly developing career skills and successfully entering the employment market. Where a woman is trained, healthy, and employable, and where a woman’s efforts have not contributed to her husband’s wealth or earning potential, the necessity for an alimony award upon breakup of the marriage is not great. (cont.)

7. Types of Illegality • In either formation or performance • Contrary to public interest, policy or welfare or Violation of a Statute or of a rule of Common Law • FREY v. FREY 471 A.2d 705 (1984) (cont.) • Although the state has an interest in protecting the institution of marriage, no state interest exists in preserving a marriage in which the relationship has broken down irretrievably. Divorce has become commonplace, and the percentage of marriages that end in divorce is significant. With divorce such a commonplace fact of life, it is fair to assume that many prospective marriage partners with certain property and familial situations would want to generate a valid antenuptial agreement settling their property rights if their marriage, despite their best efforts, should fail. Further, the “no fault” divorce statutes in many states acknowledge the necessity of granting divorces. Where public policy recognizes that a marriage may need to be dissolved without the fault of either party, much of the rationale behind the old public policy view fades. • Because of these changes, we now reject the rule that a waiver of alimony provision in an antenuptial agreement is void per se as contrary to public policy. This is in accord with a majority of jurisdictions that have considered the question in recent years, as well as with the public policy of our legislature, which passed the Marital Property Act allowing parties to designate which property will not be considered marital property upon divorce. From now on, antenuptial agreements will be considered on their own terms to determine enforceability. They must be fair, the parties must have made frank and full disclosure of all their assets, and the agreements must have been entered freely and with full knowledge of their meaning and effect. Further, we emphasize that independent legal advice in evaluating the agreement is important, as is the fact that the parties stand in a confidential relationship. If the agreement was obtained through fraud, duress, mistake, misrepresentation, material nondisclosure, or other overreaching, or is otherwise unjust, it will not be enforced.

8. Effect of Illegality • General Rule: Hands Off Illegal Agreements = Courts will not enforce = Void • No recovery for breach, consideration, damages, etc. • Neiman v. Provident Life, p. 237 • A party illegally practicing law is not able to claim disability benefits from insurance company for his inability to function as an unlicensed lawyer. Contrast this case with the Baby M case. Could the fact that Nieman was purposely trying to evade the law be determinative? As a matter of public policy, that statutorily-prohibited occupation is not an insurable risk. Note that the court points out, “[t]o rule otherwise would create the incentive for individuals, like Neiman, to insure not merely against the possibility of becoming physically disabled but in effect against the possibility of getting caught.”

9. Effect of Illegality • General Rule: Hands Off Illegal Agreements = Courts will not enforce = Void • No recovery for breach, consideration, damages, etc. • Question 7 at end of chapter • Trotter v. Nelson • Clerk sues to enforce agreement with an Attorney to pay referral fee for personal injury/worker’s comp referrals, which agreement is in violation of the Indiana Rules of Professional Conduct • Illegality prevents enforcement • But who was subject to and violated the rules? The Attorney!

10. Effect of Illegality • No recovery for breach, consideration, damages, etc. • Exceptions (in the Public Interest to allow) • Ignorance of Fact/Special Regulation (Only in some cases) • Only for performance before realized illegal • Only if no immoral behavior or present serious threat to public welfare • For Either if both unaware • For the “innocent party” if unaware and other subject to • Sometimes where misrepresentation, fraud, duress, or undue influence • Rights of Protected Parties • Where party is of class statute intended to protect • Recession Before Performance of Illegal Act

11. Effect of Illegality • Where Divisible Contracts • Courts may enforce legal parts • Caution: Clause in contract regarding impact if any part declared illegal

12. Contracts to Commit Illegal Acts • Agreements to commit crimes or acts that have a criminal net effect are Illegal • A contract that cannot be completed w/o committing a tort is illegal

13. Contracts Illegal by Statute • Wagering/Gambling contracts in violation of statutes • Insurance Contracts w/o an Insurable Interest • Bargains Void/Voidable • Usury(excessive interest rate) • Sunday/”Blue Law” • Unless ratified • Unless to protect health, life & property

14. Contracts Illegal by Statute • Contracts with Persons who: • Failed to obtain a required license • Failed to pay licensing fee • Birbrower, Montalbano, Condon & Frank v. Superior Court, p. 241 • Attorneys not licensed to practice in California were required to forfeit fees in connection with its representation of a California company. The California Supreme Court found that the firm cannot collect for its representation of the client in California because it violated California law by not gaining membership in the California bar before embarking on such representation. Note that the court mentions that the firm is a large one, serving clients in several states, but this does not excuse them from complying with state bar rules. Note that several states are changing their rules in regard to multistate practice.

15. Contracts Illegal by Statute • Contracts with Persons who: • Failed to obtain a required license • Failed to pay licensing fee • Exception: Revenue Raising Statutes = Non-Regulatory • Question 9 at end of chapter • No. When a statute does not state whether a violation deprives the parties of their right to sue on the contract, a distinction is made between revenue-raising statutes and those whose purpose is to protect the public against incompetence and fraud. There is no relationship between the payment of annual fees and the competence or character of an architect. The provision requiring renewal by way of payment of a $15 fee was, therefore, not for public protection but for raising revenue. Wilson v. Kealakekua Ranch, Ltd., 551 P.2d 525 (Sup. Ct. Hawaii 1976).

16. Contracts Contrary to Public Policy • Idea of Public Policy • Best Interests of Society (as determined by the court) • May change with time • Morals/Ethics Factor • A.Z. v. B.Z., p.242 • Pre-fertilized embryo contract • Contract to wife • Presigned by Husband/filled in by wife • Divorce • Husband seeks to enjoin use • Court held: enforcement vs. public policy • Agreement that compels one to become a parent w/o their consent vs. public policy

17. Contracts Contrary to Public Policy • Injurious to Public Service • Corruption/Bribery/Improper Influence/Inducement of Conflict of Interest • Influence Fiduciaries • Undue influence • Exculpatory Clauses • Courts may enforce, unless willful misconduct, fraud, etc. • Question 10 at end of chapter • Kyriazia Case • The University of West Virginia is not allowed to assert an exculpatory clause against a student injured in a rugby game. • Note how the court considers the public interest and the inherent fairness of the agreement in its analysis of the enforceability of the clause. The parties’ unequal bargaining power was an important factor in the decision.

18. Contracts Contrary to Public Policy • Exculpatory Clauses • Johnson v. New River, p. 243 • New River is not allowed to assert an exculpatory clause against a child killed on a whitewater rafting trip. The court finds the exculpatory clause void due to the duty owed the child. The court also pointed out that the clause was void under the Whitewater Responsibility Act. The court is unable to find a practical distinction between a waiver of liability executed by a parent on behalf of a minor and an agreement through which a parent agrees to indemnify a third party for any harm that may befall a minor through the third party's failure to comply with a safety statute. If a parent were able to waive liability on behalf of a minor, the responsibility for paying for any harm suffered by the minor (in particular, medical expenses) would necessarily  be borne by the parent, who is obligated to care for her child. Similarly, a parent who indemnifies a third party shifts the responsibility for paying for the financial consequences of harm that befalls the minor as the result of that third party's illegal conduct. In both situations, then, the result is identical: a tortfeasor who fails to comply with a safety statute is able to shift his financial responsibility for his tortious conduct to the parent of the minor victim. If that shift is unacceptable when the applicable document is a "release of liability," then that shift must necessarily also be unacceptable if the applicable document is styled an "indemnification."

19. Contracts Contrary to Public Policy • Restraint of Trade • e.g. Unreasonable covenants not to compete • Courts look at reasonableness of time, geographic range, etc. • e.g. Unreasonable Restrictive Covenants • Advanced Marine v. PRC, Inc., p. 245 • The court enforces a restrictive covenant against a manager because the covenant was not found to be unreasonable: the restriction lasted only a brief period of time and it narrowly defined the activity it prohibited. Note that Pirrera knew about and understood the restrictions and was willfully breaching them.

20. Contracts Contrary to Public Policy • Unequal Bargains • Courts usually not interfere based on freedom of contract • Exceptions: • Unconscionable • Procedural • Convoluted, unclear, fine print, etc. • Substantive • Grossly unfavorable • Question8 at end of chapter • No. The doctrine of unconscionability relieves a person from an unfair contract or an unfair term of a contract. The Harrises argue that the contract is procedurally unfair because the arbitration clause is in fine print on the back of the form. However, since this was a one-page contract, there was no procedural unconscionability here. The Harrises also argue that the clause is substantively unconscionable because Green Tree retains the right to sued but they can’t, and Green Tree can choose the arbitrator without their consent. We find that arbitration agreements are still enforceable even though one party can still litigate issues. Finally, we read the arbitration term to mean that if the Harrises object to Green Tree’s choice of an arbitrator, they can petition the court to appoint another one. The arbitration agreement is enforceable. Harris v. Green Tree Financial Corp., 183 F.3d 173 (3rd Cir. 1999). • e.g. Adhesion - Terms very one-sided and dictated by one party = no bargaining

21. Contracts Contrary to Public Policy • Unequal Bargains • Courts usually not interfere based on freedom of contract • Exceptions: • Unconscionable • Alexander v. Andrews, p. 247 • Where a contract was formed between two parties with a great disparity in bargaining power that led the party with lesser power, the employee, to sign it, and where the terms of the contract are decidedly one-sided, the contract was declared unconscionable and unenforceable. Note that unconscionability is generally used in contracts between merchants and consumers. However, unconscionability will probably appear increasingly often in business versus business contracts, especially where one of the parties has vastly superior bargaining strength (utilities, large franchisors, etc.). A court may either refuse to enforce a contract containing an unconscionable provision or enforce the remainder of the contract without the unconscionable term. However, the court points out that severance was not an appropriate remedy in this case. The contract contained a clause providing that the remaining agreement shall remain in force even if any provision is held to be invalid. Even taking this provision into account, the court found that unconscionability permeated the agreement and thoroughly tainted its central purpose of requiring the arbitration of employment disputes. In refusing to allow severance, the court pointed out that it did not challenge the policy favoring arbitration and recognized the benefits of such, but could not give effect to an agreement to arbitrate afflicted by so much unfairness.