Business law: chapter 15 (illegality)

Illegality and Divisible Contracts

A contract may call for the performance of several promises, some legal and some illegal. If the contract is divisible- that is, if the legal parts can be separated from the illegal parts- the courts enforce the legal parts of the contract. If the contract is not divisible, the illegal parts "taint" the entire contract, making it unenforceable

Exculpatory clause

An exculpatory clause is a provision in a contract that attempts to relieve one party to the contract from liability for the consequences of his or her own negligence. Seeks to avoid liability for willful misconduct or fraud, however, are generally unenforceable.

Contract to influence fiduciaries

Any agreement that tends to induce a fiduciary to breach his or her fiduciary duties is illegal This is so because such an agreement operated as a fraud on the principal or beneficiary who is entitled to the fiduciary's loyality

Wagering statutes in a general sense

Generally, if there is no financial interest other than that created by the bet, the contract will not be enforced.

What are the exceptions of illegalities?

Ignorance of fact or special regulation Rights of protected parties. Rescission before performance of any illegal acts. Divisible contracts

Rights of protected parties

In cases in which a person whom a statute seeks to protect enters into an agreement in violation of the statute, the protected person is allowed to enforce the agreement, or at least recover any consideration he or she has parted with. Example: Licensing of corp.

Exculpatory clauses are permissible if

Negligence AND Freely bargained for

What does ignorance of fact or special regulation mean and how is recovery possible?

Recovery is limited to performance up until LEARNING of the illegality, AND If NO immoral behavior or threat to public welfare has occurred.

What is revenue-raising statues

Revenue-raising statues are a major exception to regulatory statues. The failure to obtain license required by a statute whose sole purpose is to raise revenue does not affect the legality of the unlicensed persons' agreement.

Rescission before performance of illegal acts

To encourage such people to cancel illegal agreements, the courts will allow one who rescinds the contract before any illegal act has been preformed to recover any consideration given.

Unequal bargains

Unconscionable contracts are not enforceable

Statutes declaring bargains void or voidable

Usury laws and Sunday laws

Fiduciary meaning

a person in position of trust or confidence like a trustee, agent, or partner

What are unsury laws

prohibits charging more than a stated amount of interest for the use of money.

What is the general rule of effects of illegalities on contract

void

Public policy

"What the court believes is in the best interests of society"

Contracts in restraint of trade

A contract where its sole purpose is to restrain trade is illegal.

For unequal bargains

THIS DOES NOT APPLY SIMPLY TO A BAD DEAL

Regulatory statutes

The most common kind of regulatory statute requires persons, partnerships, or corporations to acquire a license before engaging in a regulated activity. The BASIC purpose of such statues is to protect the public from dishonest or unskilled persons.

Contracts injurious to public service

agreements that induce public servants to deviate from their duties are illegal. Example: agreements to pay public employees more or less than their lawful salary is unlawful. Agreements that create a conflict between a public employee's personal interest and duties are also illegal.

Adhesion contracts

are contracts in which the only choice for one of the parties is between "adhering" to the terms dictated by the other party or not contracting at all. A court may refuse to enforce such an agreement as contrary to public policy.

Hands off illegal agreements

his the general postition taken by the courts. A court will not enforce illegal agreements but will leave parties where it finds them. That means a party to an illegal agreement generally cannot recover damages for breach of the agreement, recover consideration given to the other party, or recover in quasi contract for benefits conferred on the other party.

It is generally held that agreements by unlicensed persons to preform regulated services or engage in regulated businesses are

illegal and therefore unenforceable

A contract that cannot be performed without committing a tort (Agreements to commit torts) is

illegal and void

An agreement that calls for the commission of crime (Agreements to commit crimes) is

illegal and void

If restraint of trade is merely "ancillary" (meaning supplementary to)

it may be enforceable IF it is "no broader than reasonably necessary" !!!

"Adhesion contracts" are

not enforceable Only choice is to "adhere" to the terms of the contract does not amount to a contract at all - no bargaining.

What are Sunday laws

prohibits performance of certain work and the transaction of certain business on Sunday. Varies from state to state. In most states the trend is to allow weekday "ratification" of Sunday contracts.

UCC 2-302

recognized the idea of an UNCONSCIONABLE contract The code does not define unconscionable, leaving it instead for the courts to define. Unconscionable contracts are often described as those that are so unfair that they "shock the conscience of the court"

Speculative bargain

such as stock and commodity market transactions are enforceable and legal. The purchasers are obviously hoping their purchases will increase in value and the sellers believe they will not.

If the parties agree who shall bear an existing risk

that is a legal risk-shifting agreement

When parties create a new risk for the sole purpose of bearing it,

that is an illegal wager

Exculpatory clauses are impermissible if

to avoid liability regarding willful misconduct and/or fraud

Risk-shifting agreement

where the parties agree who bears an existing risk the contract is enforceable.