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