CHAPTER 9

1. CHAPTER 9 LEGALITY

2. Nature and Consequences of Legality • Even if a contract has all the other elements that make up a valid contract, it may still be invalid if it lacks a legal purpose. • Violates Statutory Law • Illegality of the action renders the contract void • Parties would be subject to penalty specified under the law(s) violated • Conspiracy—individuals who agree to commit crimes for a promised consideration • If it is impossible to separate a contract into separate parts and if any part of the contract is determined to be illegal, none of the contract is valid. • Even if some parts of the contract are legally enforceable

3. Divisible Contracts • If certain promises and actions in a contract can be successfully performed by themselves, then the contract is said to be divisible. • The courts may enforce those parts that are legal and revoke the parts that are not.

4. A furniture store required an unemployed woman on public assistance to sign its standard contract for credit every time she made a purchase at the store. One of the terms of the contract stated that the store would ownevery item she purchased untilall the items were fully paid. The woman made several purchases at the store, signing this same standard contract each time.After several years of making all of her payments, she purchased a couch and missed 2 payments. The store believed it had the right, under the contract, to take back all the items the woman ever purchased there. 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.

5. In Pari Delicto • In Equal Fault • Both parties knew the agreement was illegal • Neither side can sue for breach of contract • If one party is unaware the law is being broken and has no intent to break the law, the courts may grant relief to the “innocent party”

6. Agreements That Violate Statutes • State legislatures pass laws declaring that certain types of agreements are illegal and void because they violate: • Civil and criminal statutes—agreements that require one party to commit a tort or a crime • Tort—a private wrong committed against a person (Civil) • Usury statutes—when a lender charges more than the maximum legal interest rate allowed by state law • Interest is the fee the borrower pays to the lender for using the money.

7. Agreements That Violate Statutes: Gambling Statutes • Gambling agreements in which one party wins and another party loses, even if some skill may be involved. • Includes • Playing cards for money • Money wagers or bets on elections or sports events • Buying tickets in a sports pool • Changes in State Laws: • Betting at racetracks • Certain forms of off-track betting • State-run lotteries

8. Agreements That Violate Statutes: Gambling Statutes • Lottery • A game that consists of drawing Lots • Tickets with different combinations of numbers printed on them where prizes are distributed to the winners from the pool of persons buying a chance. • Often, organizations who sell gambling devices have to donate a percentage of the profits to charities • VFW, Eagles

9. Agreements That Violate Statutes: Sunday Statutes • In some states, it is illegal to make or perform contracts on Sunday. • Called Sunday statutes or blue laws. • The statutes vary greatly from state to state. Handout #1

10. Agreements That Violate Statutes: Licensing Statutes • A license is a legal document stating that the holder has permission from the proper authorities to carry on a certain trade or profession. • All states have statues that require persons to have a license to practice certain trades or professions and engaging in such a trade or profession without a license is illegal. • Some licenses are designed to protect the public from dealing with unqualified persons. • Some state statutes require licenses simply to raise revenue. Name a profession that requires a license.

11. Agreements That Violate Statutes: Licensing Statutes • In most states the following trade and professional workers must be licensed. • Doctors/Nurses/Health Care Workers • Child Care Workers • Surveyors • Funeral directors • Barbers/Hairdressers • Plumbers/Electricians

12. Reviewing What You LearnedPage 193 Questions 1-4 • 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. • What are the consequences of illegality 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. • What contracts are illegal by statutory law? Contracts that violate a state’s civil or criminal statutes, usury statutes, gambling statutes, licensing statutes, or Sunday statutes. • What are the different types of licenses? Some licenses raise revenue, other are designed to protect the public.

13. CHPATER 9 Illegal Contracts Illegal contracts that violate public policy violate state statutes • 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

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

15. Agreements Contrary to Public Policy • Agreements that unreasonably restrain trade • Contracts not to compete • Price fixing agreements • Agreements to defeat competitive bidding • More common agreements include: • Agreements to obstruct justice • Agreements inducing breach of duty or fraud • Contracts interfering with marriage

16. Agreements that Unreasonably Restrain Trade • The law protects our rights to make a living and do business in a market economy. • A restraint of trade is a limitation on the full exercise of doing business with others. • Three types of contracts that violate this rule: • Agreements not to compete • Price fixing • Agreements to defeat competitive bidding

17. Agreements that Unreasonably Restrain Trade • Agreements not to compete • When a business owner sells a business, sometimes the sales contract will include a provision called a restrictivecovenant, which is a promise not to compete. • The seller of the business will not open a competing business within a certain area for a period of time after the sale. • The court will uphold such a restriction if it is reasonable in time and geographic location. • Promises not to compete are also sometimes found in employment contracts. • Such contracts are enforced only as necessary to protect the former employer from unfair competition.

18. Agreements that Unreasonably Restrain Trade • Price fixingoccurs when competitors agree on certain price ranges within which they set their prices. • Price fixing discourages competition and raises prices. Q: Is the ever changing price of gasoline at the pumps price fixing???

19. Agreements that Unreasonably Restrain Trade • Agreements to defeat competitive bidding • A bid is an offer to buy or sell goods or services at a stated price. • Laws often require governments to construct public works or buy goods and services through competitive bidding. • In the process of competitive bidding, rivals submit bids for a project. The firm with the lowest qualified bid wins the contract. • If the bidders get together and agree not to bid lower than a certain price, then they are not bidding fairly. These agreements and contracts are not enforceable.

20. Agreements that Obstruct Justice • Any contract that interferes with the administration of justice is illegal. • Such agreements include: • Protecting someone from arrest • Encouraging lawsuits • Giving false testimony • Bribing a juror

21. Agreements Inducing Breach of Duty or Fraud • All congressional and state representatives and all other public officials hold positions of trust. These officials owe a duty to work for the best interest of the public. • Any contract that tries to influence the representatives to use their positions for private gain is unenforceable. • This rule also applies to private persons who are in positions of trust.

22. Agreements Interfering with Marriage • The law encourages marriages and protects family relationships. • Contracts that discourage, harm, or interfere with good family relationships are illegal and unenforceable in court. • For example, a contract promising money in exchange for not marrying would be void.

23. Reviewing What You LearnedPage 199 Questions 1-4 • What is the legal doctrine of public policy? No one should be permitted to do anything that harms the public at large. • 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. • What types of contracts involve an unreasonable restraint of trade? Contracts not to compete, price fixing, and agreements to defeat competitive bidding. • 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.