PART

PART

Contracts

Introduction to ContractsThe Agreement: Offer

The Agreement: AcceptanceConsideration

Reality of Consent

3

McGraw-Hill/Irwin Business Law, 13/e

© 2007 The McGraw-Hill Companies, Inc. All rights reserved.

PART

PART

Contracts

Capacity to ContractIllegality

WritingRights of Third Parties

Performance & Remedies

3

McGraw-Hill/Irwin Business Law, 13/e

© 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Illegality

PA ET RHC 15

“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

Learning Objectives

Meaning of illegalityTypes of illegal agreementsEffect on contractsSpecial doctrines

15 - 5

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

Illegality

15 - 6

Sometimes government legislatures 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

Agreements That Violate Statutes

15 - 7

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

Agreements That ViolatePublic Policy

15 - 8

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

Licensing Statutes

15 - 9

Riggs v. Woman to Woman, P.C.

Facts & Procedural History: Riggs joined defendant medical

practice after assurances that the medical practice was a licensed professional corporation Employment agreement contained a

covenant not to compete Riggs discovered that defendant was

not a licensed professional corporation

15 - 10

Riggs v. Woman to Woman, P.C.

Issue & Court’s Discussion: Was the employment agreement void

because defendant was not licensed? Defendant properly attempted to

obtain the license and when it determined it was not properly licensed, it remedied the situation and obtained the license Had operated as a de facto corporation

15 - 11

Riggs v. Woman to Woman, P.C.

Court’s Analysis & Ruling: Purpose of the

licensing act is permissive – to allow a medical practice the protections of a corporation; not to protect the public

Since defendant did nothing illegal, the contract is not void15 - 12

If the sole purpose of an agreement is to restrain competition, it violates public policy and is illegal

If the restraint on competition was part of an otherwise legal contract, the result may be different because the parties may have a legitimate interest to be protected by the restriction on competition

Agreements in Restraint of Competition

15 - 13

Courts enforce a non-competition clause if: It serves a legitimate business purpose, The restriction is reasonable in time,

geographic area, and scope It does not impose an undue hardship

Example: Jay’s Custom Stringing, Inc. v. Yu in which the clause was impermissibly broad and unenforceable

Non-competition clauses

15 - 14

Under the doctrine of unconscionability, courts refuse to grant the equitable remedy of specific performance for breach of contract if the contract is oppressively unfair

Unconscionability means the absence of meaningful choice together with terms unreasonably advantageous to one of the parties

Unconscionable Agreements

15 - 15

UCC 2–302 gives courts power to refuse to enforce all or part of a contract for the sale of goods or to modify such a contract if it is found to be unconscionable

Example: Circuit City Stores, Inc. v. Mantor Company pressured and threatened employee to

sign an agreement to arbitrate in the event of dispute, but court believe it had gone too far

Clause was unconscionable, therefore the contract was unenforceable

Unconscionable Agreements

15 - 16

A contract of adhesion is a contract, usually on a standardized form, offered by a party who is in a superior bargaining position on a “take-it-or-leave-it” basis

Courts will enforce the contracts unless the term is harsh or oppressive

Contracts of Adhesion

15 - 17

An exculpatory clause (a release or liability waiver) in a contract attempts to protect one party from liability for damages

Exculpatory clauses are perhaps suspect on public policy grounds, but courts do not want to interfere with the agreement if it does not threaten public health or safety

Exculpatory Clauses

15 - 18

Test Your Knowledge

True=A, False = B An agreement that promotes

violating an environmental permit is illegal

A person can demand restitution for breach of an illegal agreement

Non-competition agreements are illegal agreements

15 - 19

Test Your Knowledge Multiple Choice

A contract of adhesion: (a) is always illegal (b) are contrary to public policy (c) is a “take it or leave it” agreement

An exculpatory clause: (a) Protects one party from liability for

damages (b) Promotes violation of a civil law (c) Is contrary to public policy and illegal

15 - 20

Thought Question

Do you think enforcing non-competition clauses in employment agreements is good public policy?

15 - 21