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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

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Learning Objectives

• Explain the concept of illegality as it pertains to contract law

• Identify illegal agreements and discuss the effect of illegality

• Analyze effect of non-compete and exculpatory clauses

• Explain unconscionability

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• 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 voluntary consent existed between

two parties with capacity to contract

• Effect: no remedy for breach of an illegal agreement

Illegality

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Coma Corporation v. Kansas Department of Labor

• Facts & Procedural History: – Coma Corp. (Coma) entered into

employment contract with undocumented worker for above-minimum wage, but paid less than agreed amount, then fired worker

– Worker filed claim with Dept. of Labor (DOL), which awarded above-minimum wages

– Coma appealed; court reduced DOL’s award to minimum wage due to illegality of contract

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• The Appeal to Kansas Supreme Court: – Coma’s argument: employment contract

unenforceable and federal immigration laws preempt state wage laws

– Court: federal preemption not presumed, and to deny enforceability of employment contract would contravene Kansas public policy to protect wages and wage earners

– Reversed in favor of KS Dept. of Labor

Coma Corporation v. Kansas Department of Labor

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• 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

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• These agreements 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– Agreements in restraint of competition

Agreements That Violate Public Policy

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• 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

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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

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• 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 de facto corporation

Riggs v. Woman to Woman, P.C.

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• 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 void

Riggs v. Woman to Woman, P.C.

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• 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

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• 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: Nasc Services, Inc. v. Jervis in which the clause would “create an oppressive and unfair scenario” for former employees

Non-competition clauses

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

• Exculpatory clauses may be suspect on public policy grounds, but courts will not interfere if waiver is not a threat to public health or safety– Example of a clause in contravention of

public policy: Marcinczyk v. State of New Jersey Police Training Commission

Exculpatory Clauses

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

Unconscionable Agreements

• Courts refuse to grant equitable remedy of specific performance for breach of contract if contract is oppressively unfair

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• 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: Moore v. Woman to Woman Obstetrics & Gynecology

Unconscionable Agreements

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• Facts: – Moore had a high risk pregnancy and

was referred by defendant medical practice group to another gynecologist

– Before treatment, Defendant required Moore to sign an agreement to arbitrate all claims, including pre-dispute medical malpractice claims

– Moore gave birth to a baby with Down Syndrome and sued for malpractice

Moore v. Woman to Woman Obstetrics & Gynecology

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• Appellate Decision: – Trial court compelled Moore to arbitrate,

but appellate court reversed, holding that:1.Pre-dispute agreements to arbitrate

claims for medical malpractice could be enforceable as matter or law and were not contracts of adhesion

2.However, in this case, several factors made this agreement unconscionable and unenforceable

Moore v. Woman to Woman Obstetrics & Gynecology

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• 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

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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

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• Multiple Choice– A contract of adhesion:

a) is always illegalb) are contrary to public policyc) 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 lawc) Is contrary to public policy and illegal

Test Your Knowledge

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Thought Question

• Is the enforcement of non-competition clauses in employment agreements a good public policy?