Donald R. Simon, Esq. Adjunct Faculty KCKCC - Leavenworth Center

1. Donald R. Simon, Esq. Adjunct Faculty KCKCC - Leavenworth Center

2. Week 6: Contract illegality. Violations of statutes and public policy. Unconscionability. Quiz: Chaps 13, 14, and 15.

3. Chap. 15: Illegality

4. Chapter 15 Illegality K 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.

5. Chapter 15 Illegality Subject matter and purpose of the K must be legal at the time the K is entered into to be valid. Effect: no remedy for breach of an illegal agreement.

6. Chapter 15 Illegality 3 types: Agreements that violate statutes; Agreements that violate public policy; and Unconscionable agreements and Ks of adhesion.

7. Chapter 15 Illegality Agreements that violate statutes. Legislatures may enact statutes that declare certain types of agreements unenforceable, void, or voidable. Examples: New law changes the limits allowed for interest to be charged on a loan. New law prohibiting creation of a landfill in environmentally sensitive areas. Wagering Ks and lotteries are illegal because of statutes prohibiting gambling, betting, and other games of chance.

8. Chapter 15 Illegality Agreements that violate public policy. Public policy: a widely shared view about what ideas, interests, institutions, or freedoms promote public welfare. We have strong public policies favoring the protection of human life, free competition, and private property. May also be based on a prevailing moral code, on an economic philosophy, or on the need to protect a valued social institution such as the family.

9. Chapter 15 Illegality Agreements that violate public policy. Agreements that violate public policy include: Agreements to commit a crime. Agreements promoting an illegal purpose. Agreement to perform an act for which the person is not properly licensed. Agreements in restraint of competition.

10. Chapter 15 Illegality Agreements that violate public policy. Licensing statutes: A common regulatory statute requires a person to obtain a license, permit, or registration before engaging in a certain business or profession. If the purpose of the statute is to protect the public against dishonest or incompetent practitioners, then an agreement is unenforceable if an unlicensed person agrees to do an act that requires a license.

11. Chapter 15 Illegality Agreements that violate public policy. Licensing statutes: Applies to doctors, lawyers, dentists, and other professionals who must be licensed to practice their professions. Regulations are put in place to protect the public against incompetent or dishonest practitioners. Even if the unlicensed person does not charge for the service, the agreement will still be considered void against public against.

12. Chapter 15 Illegality Agreements that violate public policy. Anti-competition statutes: If the sole purpose of an agreement is to restrain competition, it violates public policy and is illegal. E.g., Two competitors collude to set prices. If the restraint on competition was part of an otherwise legal K, the result may be different because the parties may have a legitimate interest to be protected by the restriction on competition. E.g., Noncompete clause for a former employee.

13. Chapter 15 Illegality Non-competition clauses and agreements. A covenant not to compete is a provision in a personal services K whereby the employee agrees that, at the end of the employment relationship, he/she will not engage in the same type of work for a competitive entity for a specified period of time within a specific geographic area. Frequently appear in employment Ks, Ks for the sale of a biz, partnership agreements, and small biz buy-sale agreements.

14. Chapter 15 Illegality Non-competition clauses and agreements. Generally, noncompete clauses are included in Ks where an employer needs to protect trade or biz secrets, including, for example, customer and sales lists; or where the employer has invested substantial resources to train and market the employee. In either case, the concern is that the employee will leave to work for a competitor, and take the trade secrets, customers, or goodwill with them.

15. Chapter 15 Illegality Non-competition clauses and agreements. State law governs the use of noncompetes and enforceability varies considerably from state to state. Generally speaking, a noncompete will be enforceable if, at a minimum, it is: designed to protect employer�s legitimate interests; limited in geographical scope and time duration; and not unduly burdensome.

16. Chapter 15 Illegality Non-competition clauses and agreements. Courts will balance: free labor markets and a person�s right to work in his/her chosen field versus the prevention of unethical biz behavior such as the theft of trade secrets. These issues are reviewed by courts on a case-by-case basis when there is a legal dispute with regard to the application or enforceability of a noncompete.

17. Chapter 15 Illegality Agreements that violate public policy. Exculpatory clause (a release or liability waiver): Attempts to protect one party from liability for damages. Intended to protect one party from being sued for their wrongdoing or negligence.

18. Chapter 15 Illegality Agreements that violate public policy. Exculpatory clause (a release or liability waiver): A restaurant checks your coat but your ticket states they are not responsible for loss or damage. A parking lot agreement where the parking lot says it is not responsible for loss of contents or damage to the vehicle. A drycleaner who says they are not responsible for changes in the color or texture of the garments.

19. Chapter 15 Illegality Agreements that violate public policy. Exculpatory clause (a release or liability waiver): A provision in a lease where the landlord says he is not responsible for damage, injury, or loss which occurs on the property. A clause in a trust agreement�which relieves the trustee from liability resulting from any act performed in good faith under the trust.

20. Chapter 15 Illegality Agreements that violate public policy. Exculpatory clause (a release or liability waiver): Are suspect on public policy grounds, but courts do not want to interfere with the agreement if it does not threaten public health or safety. Cannot excuse liability from harm which is caused intentionally or recklessly.�

21. Chapter 15 Illegality Agreements that violate public policy. Exculpatory clause (a release or liability waiver): Should be conspicuous. Larger type, bold, or in all capitals. Should be clear and understandable. Should be specific and state specific theories of liability, such as �negligence.�

22. Chapter 15 Illegality Unfairness in agreements: Historically, courts were reluctant to inquire as to the fairness of an agreement. Belief in the �freedom of K� principle--only got involved when fraud, duress, etc. were present. Biz practices have changed such that the bargaining positions of the parties might be grossly unequal.

23. Chapter 15 Illegality Unfairness in agreements: The increasing use of pre-printed forms has enabled parties with superior bargaining power and biz sophistication to dictate virtually all K terms. Lawmakers responded with protectionist legislation like minimum wage laws and rent control ordinances.

24. Chapter 15 Illegality Unconscionability: When a court uses the word unconscionable to describe conduct, it means that the conduct does not conform to the dictates of conscience. Unconscionability means the absence of meaningful choice together with terms unreasonably advantageous to one of the parties.

25. Chapter 15 Illegality Unconscionability: An unconscionable K is one that is unjust or extremely one-sided in favor of the person who has the superior bargaining power. Courts find that unconscionable Ks usually result from the exploitation of consumers who are often poorly educated, impoverished, and unable to find the best price available in the competitive marketplace.

26. Chapter 15 Illegality Unconscionability: In addition, when something is judged unconscionable, a court will refuse to allow the perpetrator of the conduct to benefit. Is determined by examining the circumstances of the parties when the K was made; these circumstances include, the bargaining power, age, and mental capacity of the parties.

27. Chapter 15 Illegality Unconscionability: Typical unconscionable clauses include provisions that limit damages against the seller, limit the rights of the purchaser to seek court relief against the seller, or disclaim a warranty. UCC 2�302 gives courts power to refuse to enforce all or part of a K for the sale of goods or to modify such a K if it is found to be unconscionable.

28. Chapter 15 Illegality Contracts of adhesion: A K of adhesion is a K, usually on a standardized form, offered by a party who is in a superior bargaining position on a �take-it-or-leave-it� basis. Gives the purchaser no ability to negotiate because of an unequal bargaining position.

29. Chapter 15 Illegality Contracts of adhesion: There is nothing unenforceable or even wrong about adhesion Ks. In fact, most businesses would never conclude their volume of transactions if it were necessary to negotiate all the terms of every K. This does not mean, however, that all adhesion Ks are valid.

30. Chapter 15 Illegality Contracts of adhesion: Q: When confronted with a K of adhesion, with no opportunity to negotiate, it is fair to conclude that a customer has consented to all of the terms? A: Consented to the terms that he/she could have concluded to be in the K, but not to any terms that hew/she could not have expected to by contained in the K. Courts will enforce the Ks unless the term(s) in question is/are harsh or oppressive.

31. Chapter 15 Illegality True or False? An agreement that promotes violating an environmental permit is illegal. True. This is an agreement that violates a statute.

32. Chapter 15 Illegality True or False? A person can demand restitution for breach of an illegal agreement. False. No remedy for breach of an illegal agreement.

33. Chapter 15 Illegality True or False? Non-competition agreements are illegal agreements. False. Courts enforce a non-competition clause if it serves a legitimate biz purpose; the restriction is reasonable in time, geographic area, and scope; and it does not impose an undue hardship.

34. Chapter 15 Illegality Multiple choice A contract of adhesion: is always illegal. are contrary to public policy. is a �take it or leave it� agreement. Answer: c

35. Chapter 15 Illegality Multiple choice An exculpatory clause: protects one party from liability for damages. promotes violation of a civil law. is contrary to public policy and illegal. Answer: a

36. Chapter 15 Illegality Multiple choice Helga owns an insurance biz in Idaho. Her clients are all Idaho residents. She later sells her biz to Carlos. As part of the deal, the K contains a non-compete clause that prevents Helga from operating an insurance biz anywhere in Idaho, Washington, or Oregon for 5 years. Six months after this sale, Helga opens an insurance biz in Oregon. If Carlos seeks to enforce the non-compete agreement against Helga, will he probably be successful?

37. Chapter 15 Illegality Multiple choice Non-compete clause: Yes, because this agreement is reasonable. Yes, because non-compete agreements that are part of the sale of a biz are always enforced. No, because this agreement is not reasonable. No, because non-compete agreements that are part of the sale of a biz are seldom enforced. Answer: c

38. Chapter 15 Thought question Do you think enforcing non-competition clauses in employment agreements is good public policy?

39. Week 7: Writing in Ks. Statute of frauds. Ks. required to be in writing. K interpretation. Read Chap. 16