Illegality

1. Illegality “In a free society the state does not administer the affairs of men. It administers justice among men who conduct their own affairs.” Walter Lippman

2. Learning Objectives • Meaning of illegality • Types of illegal agreements • Effect on contracts • Special doctrines 15 - 2

3. Illegality • An agreement will be unenforceable because of illegality if the agreement involves an act or promise that violates a law or is against public policy • Even if there was voluntary consent between two parties who have capacity to contract • Effect: no remedy for breach of an illegal agreement 15 - 3

4. Types of Illegal Agreements • Agreements that violate a statute • Agreements that violate public policy: • Agreements to commit a crime • Agreements promoting an illegal purpose • Agreement to perform an act for which the person is not properly licensed • Example: Riggs v. Woman to Woman P.C. • Agreements in restraint of competition 15 - 4

5. Agreements in Restraint of Competition • If sole purpose of an agreement is to restrain competition, it violates public policy • A non-competition clause restrains competition, but courts enforce the clause if: • It serves a legitimate business purpose, • Restriction is reasonable in time, scope, and geographic area • It does not impose an undue hardship 15 - 5

6. Unconscionable Agreements • In general, courts refuse to enforce and unconscionable contract • A contract with the absence of meaningful choice and terms unreasonably advantageous to one of the parties • UCC 2–302 gives courts power to refuse to enforce or modify unconscionable contracts for sale of goods • See Circuit City Stores, Inc. v. Mantor 15 - 6

7. Adhesion & Exculpatory Clauses • A contract of adhesion, usually a contract on a standardized form, is offered by a party who is in a superior bargaining position on a “take-it-or-leave-it” basis • An exculpatory clause(release, liability waiver) in a contract attempts to protect one party from liability for damages • Courts enforce these contracts unless effect is overly harsh or oppressive 15 - 7

8. Writing “A verbal contract isn’t worth the paper it’s written on.” Samuel Goldwyn, quoted in The Great Goldwyn (Alva Johnson, 1937)

9. Learning Objectives • Significance of a writing in contract law • The Statute of Frauds • Contracts covered by the Statute of Frauds and the requirements • The UCC & the Statute of Frauds • The Parole Evidence Rule 16 - 9

10. Basics • In general, a writing is not required to create a legally enforceable contract • Writing may be required by Statute of Frauds • Enacted in 17th century England to prevent fraud by requiring written evidence • American states adopted similar statutes • A contract is unenforceable if it does not satisfy the statute of frauds 16 - 10

11. Covered Contracts • Collateral contracts • Contracts for real estate • Contracts for more than one year • Contracts for sale of goods over $500 • Executor’s promise • Marriage as consideration 16 - 11

12. Collateral Contracts • Collateral contracts in which a guarantor promises to perform an obligation of a principal debtor to a third person (obligee) • Exception: under the main purpose or leading objectrule, no writing required if guarantor makes a collateral promise for main purpose of obtaining personal economic advantage • See Wintersport Ltd. v. Millionaire.com, Inc. 16 - 12

13. Real Estate & Sale of Goods • A writing is required for contracts for the transfer or sale of an interest in real estate • Some states require a writing for leases and certain easements on real property • UCC 2-201 requires a writing for contracts for the sale of goods for a price of $500 or more 16 - 13

14. The One Year Rule • A writing is required for bilateral contracts that cannot be performed within a year from the date of their formation (one year rule) • Likelihood of full performance is irrelevant • Test: is performance possible within year? • Example: If Jack signs contract to consult with Company X on a 13 month project, the contract must be in writing to be enforceable 16 - 14

15. Satisfying the Statute of Frauds • Most states require signed memorandum of parties’ agreement stating essential terms: • (a) identity of parties, (b) subject matter identified with reasonable certainty, and (c) signed by the party to be charged • Need not be made at time contract is made • Convention on International Sale of Goods does not require writing to enforce a contract 16 - 15

16. The Parol Evidence Rule • Parol evidence rule provides that, when parties enter a written contract they intend as a complete integration(final statement of agreement), a court will not allow evidence of prior or contemporaneous statements to alter or contradict terms of written contract • Parol evidence is admissible to explain ambiguities or allegations of fraud 16 - 16

17. Rights of Third Parties “The best minute I spend is the one I invest in people.” Kenneth Blanchard, The One Minute Manager (1993)

18. Learning Objectives • Assignment of Contracts • Delegation of Duties • Third-Party Beneficiaries 17 - 18

19. Overview • Sometimes a person who entered into a contract must transfer contract rights or duties to another person (third party) • Transfer of a right under a contract is called an assignment • Appointment of another person to perform a duty under a contract is called a delegation 17 - 19

20. Limitations on Assignment • Assignment will not be effective if it: • Is contrary to public policy • Violates a non-assignment clause in a contract • See Managed Health Care Associates v. Kethan • Adversely affects obligor in significant way • Involved a personal relationship or element of personal skill or character 17 - 20

21. Limitations on Delegation • Assignment extinguishes assignor’s right and transfers it to assignee, but delegation of a dutydoes not extinguish the duty owed by delegator to obligee • Delegator remains liable to the obligee unless obligee agrees to substitute new party for delegator by novation • In an effective delegation, performance by the delegatee will discharge the delegator 17 - 21

22. Limitations on Delegation • Duties not delegable if delegation: • Is contrary to public policy • Violates non-assignment clause in contract • Adversely affects obligee in significant way • Involved a personal relationship or element of personal skill or character 17 - 22

23. Third-Party Beneficiaries • If parties to a contract intended to benefit a third party, courts permit third party (third-party beneficiary) to enforce the contract • Referred to as third-party beneficiary • See Locke v. Ozark City Board of Ed. • Incidental beneficiaryis one obtaining a benefit as unintended by-product of a contract • No rights under contract 17 - 23