BL13
An agreement to refrain from a particular trade, profession, or business is enforceable if: a. the purpose of the restraint is to protect a property interest of the promisee. b. the restraint is no more extensive than is reasonably necessary to protect the interest. c. the secretary of state has approved the agreement. d. (a) and (b), but not (c).
(a) and (b), but not (c). a. the purpose of the restraint is to protect a property interest of the promisee. b. the restraint is no more extensive than is reasonably necessary to protect the interest.
Licensing Statutes
- A license is a formal authorization to engage in certain practices. - A regulatory license is a measure designed to protect the public against unqualified practitioners. - Examples are licenses to practice law or medicine. - A revenue license is a measure to raise money. - If the license is regulatory, a person cannot ordinarily recover fees for professional services rendered unless he has the required license. - However, if the law is for revenue purposes only, agreements for unlicensed services are enforceable.
Common Law Restraint of Trade
- A restraint of trade is any agreement that eliminates or tends to eliminate competition or otherwise obstructs trade or commerce. - One type of restraint of trade is a covenant not to compete, which is an agreement to refrain from entering into a competing trade, profession, or business. - Today, covenants not to compete are enforceable if: (1) the purpose of the restraint is to protect a property interest of the promisee, and (2) the restraint is no more extensive than is reasonably necessary to protect that interest. - Restraints typically arise in two situations: (a) the sale of a business, and (b) employment contracts.
Gambling Statutes
- A wager is an agreement that one party will win or lose depending upon the outcome of an event in which the parties' only interest is that gain or loss. - Courts generally refuse to recognize the enforceability of a gambling agreement, although some states permit certain regulated gambling such as state-operated lotteries.
Sunday Statutes
- Although common law does not prohibit Sunday contracts, some states have by statute prohibited certain types of commercial activities on Sunday. - Referred to as blue laws, they usually do not restrict activities involving "necessity" or "charity".
Excusable Ignorance
- An agreement that appears to be entirely permissible may be illegal by reason of facts and circumstances of which one of the parties is unaware. - The courts permit the party who is ignorant of the illegality to maintain a lawsuit against the other party for damages.
Exculpatory Clauses
- An exculpatory clause excuses one party from liability for his own tortious conduct. - Generally, exculpatory clauses relieving a person from tort liability for harm caused intentionally or recklessly are unenforceable as violating public policy. - Ones that excuse a party from liability for harm caused by negligent conduct are scrutinized carefully by the courts and have also been held unenforceable in certain cases.
Unconscionable Contracts
- An unconscionable contract is unfair or unduly harsh. - The Code and Restatement both limit the enforcement of unconscionable contracts. - Procedural unconscionability refers to unfair or irregular bargaining, while substantive unconscionability refers to oppressive or grossly unfair contractual terms. - These concepts are applied to determine the enforceability of certain contracts, such as adhesion contracts which are standard-form contracts where the preparer offers the other party the contract on a "take-it-or-leave-it" basis.
Sale of a Business
- As part of an agreement to sell a business, the seller frequently promises not to compete in a particular business in a defined area for a stated period of time. - Courts will enforce these if they are reasonable as to time period, geographic area, and hardship imposed upon the promisor and the public.
Employment Contracts
- Employees are frequently required to sign employment contracts prohibiting them from competing with their employers during the time of employment and for a stated period after termination. Such agreements are readily enforced during employment. - After termination, the employer must demonstrate the restriction is necessary to protect legitimate interests, such as trade secrets. - Some courts have held that non-compete agreements for employees of Internet companies are valid for only short durations, with some courts considering a non-compete clause of one year to be unreasonably long.
Party Protected by Statute
- If a statute makes an agreement illegal in order to protect one of the parties, the protected party usually has the right to withdraw from the illegal agreement and to recover the money paid. - For example, an investor protected by a law prohibiting the sale of unregistered securities may have the right to recover the money paid.
Usury Statutes
- Usury laws establish maximum permissible rates of interest. - Rates and applications vary greatly from state to state. - For a transaction to be usurious, courts require evidence of the following factors: (a) a loan (b) of money (c) that is repayable absolutely and in all events, and (d) for which an interest charge is exacted in excess of the interest rate allowed by law.
Partial Illegality
A contract may be partly unlawful and partly lawful. If it is possible to separate the illegal from the legal part, some courts will enforce the legal part.
Explain when a covenant not to compete will be upheld.
A covenant not to compete is an agreement to refrain from entering into a competing trade, profession, or business. Such a covenant will be upheld if the purpose of the restraint is to protect a legitimate property interest of the promisee and the restraint is no more extensive than is reasonably necessary to protect that interest. Covenants not to compete are typically found in contracts to sell a business and in employment contracts.
Party Withdrawing Before Performance
A party to an illegal agreement may, before performance, withdraw from the transaction and recover whatever has been contributed, if the party has not engaged in serious misconduct.
Party Not Equally at Fault
A party who enters into an illegal agreement due to fraud, duress, or undue influence is not equally at fault and may recover payments made or property transferred.
Tortious Conduct
A promise to commit a tort is unenforceable as contrary to public policy.
Which of the following would generally be considered to be a revenue-raising licensing law? a. A statute requiring that doctors be licensed b. A statute requiring that salespeople be licensed, but not establishing any educational or training requirements c. A statute requiring public school teachers to be licensed d. A statute that requires insurance agents to pass a test before selling insurance in a state
A statute requiring that salespeople be licensed, but not establishing any educational or training requirements
Corrupting Public Officials
Agreements that may adversely affect the public interest through the corruption of public officials or the impairment of the legislative process are unenforceable.
Al, an accountant, has a tax service and accounting business in Redwood City. He decides to move to Center City, which is 150 miles away and sells his accounting practice to Able and Baker, a CPA firm. In the sale contract, he agrees that he will refrain from practicing accounting anywhere within a 60-mile radius of Redwood City for a period of two years. However, on weekends he returns to his house in Redwood City, and when clients call him, he meets with them in his home. In this case: a. the two-year provision is likely to be held invalid, because it is too long a period of time. b. the agreement is invalid, because it is an illegal restraint on trade. c. Al is in violation of the sale agreement, which contained restrictions that would probably be held to be valid. d. the agreement is illegal, because it is a violation of public policy.
Al is in violation of the sale agreement, which contained restrictions that would probably be held to be valid.
Which of the following would most likely be considered a regulatory licensing law? a. A state statute requiring a license to practice medicine b. A state statute requiring that beauticians pass an examination and pay a yearly licensing fee c. A state statute requiring that public school teachers complete a required course of study and pay a yearly licensing fee d. All of the above
All of the above a. A state statute requiring a license to practice medicine b. A state statute requiring that beauticians pass an examination and pay a yearly licensing fee c. A state statute requiring that public school teachers complete a required course of study and pay a yearly licensing fee
Violations of Public Policy
Certain agreements have a tendency to be injurious to the public or public good and, as such, are contrary to public policy. - Common Law Restraint of Trade - Exculpatory Clauses - Unconscionable Contracts - Tortious Conduct - Corrupting Public Officials
A revenue licensing statute is one designed to protect the public against unqualified persons.
False
American courts generally will enforce a gambling agreement. a. True b. False
False
An exculpatory clause is a contractual clause that exempts a party from liability for his own poor business judgment in entering into a contract.
False
Big Bucks, Inc. pays Andrew Attorney to lobby for a law that would increase its annual income. This is an illegal contract.
False
Bill is currently enrolled in law school. He expects to graduate and take the bar exam in order to be able to practice law. Before Bill becomes a lawyer, he promises to represent his friend, Tom, in a breach of contract action if Tom will pay him 25% of the settlement. Bill negotiates and the case settles for $50,000. Tom refuses to pay Bill. Bill then graduates and attempts to sue Tom. Bill has a legal right to enforce the agreement. a. True b. False
False
First Bank issues a consumer loan to Happy Homemaker at an annual rate of interest of 16%. In most states, this would be an illegal contract, because First Bank is in violation of a usury law.
False
If a court finds that a part of a contract is unconscionable, it must deny enforcement of the entire contract.
False
In the absence of a specific statutory provision, an unlicensed person engaged in a business or profession for which a license is required cannot recover for services rendered if the licensing statute was enacted in order to raise revenue.
False
John promises to act as a guide on a fishing trip for a group of visiting dignitaries. The dignitaries agree to pay him $200 for his services. John guides them, but when they discover that John does not have a fishing license, they refuse to pay him. The agreement between John and the dignitaries is an illegal one, which is not enforceable. a. True b. False
False
Sara bets Bill that Hilltop High will win the big game. This is an enforceable agreement.
False
Usury statutes establish the minimum rate of permissible interest that may be contracted for between a lender and a borrower of money.
False
Violations of Statutes
Generally, agreements declared illegal by statute will not be enforced by the courts. - Licensing Statutes - Gambling Statutes - Usury Statutes - Sunday Statutes
Effect of Illegality
In most cases, neither party can recover under an illegal agreement, because both parties are in pari delicto (in equal fault). Exceptions are as follows: 1. Party Withdrawing Before Performance 2. Party Protected by Statute 3. Party Not Equally at Fault 4. Excusable Ignorance 5. Partial Illegality
Which of the following is not required in order to have a usurious transaction? a. Evidence of a loan b. Evidence of money c. Evidence of repayability in all events d. Interest within allowable legal limits
Interest within allowable legal limits
Nell gives Al $50 in return for Al's promise to defame Sara. Nell hopes to ruin Sara's chances at a promotion. Nell finds out that Al did not hold up his end of the agreement. Which of the following statements is true? a. Nell can get the money back from Al through litigation. b. Nell can get the money back and force Al to do as he promised. c. Legally, Nell can neither get the money back nor force Al to do as he promised. d. Nell can force Al to act through an appeal to the courts, but Al gets to keep the $50.
Legally, Nell can neither get the money back nor force Al to do as he promised.
Explain the "Restatement" approach to unconscionable contracts.
The Restatement does not define "unconscionable" but, like the UCC, provides that a court may scrutinize contracts to determine whether in their commercial settings, purposes, and effects, the contracts are grossly unfair or unconscionable. Courts may refuse to enforce unconscionable contracts or any part of a contract they find to be unconscionable.
CPA: Wert, an employee of Salam Corp., signed an agreement not to compete with Salam during and after being employed with Salam. Wert is the director of research and has knowledge of many of Salam's trade secrets. If Wert's employment with Salam is terminated and Wert wishes to compete with Salam, which of the following statements is not correct? a. The agreement is only enforceable if Wert voluntarily terminates his employment with Salam. b. The agreement must be necessary to protect Salam's legitimate interests in order to be enforceable. c. The geographic area covered by the agreement must be reasonable in order to be enforceable. d. The court will consider Wert's ability to obtain other employment against Salam's right to protect its business.
The agreement is only enforceable if Wert voluntarily terminates his employment with Salam.
Lucky Larson runs an illegal gambling business. Every month he pays a local judge $500 for protection. If Lucky is arrested and convicted in a trial before the same judge, and then sues the judge for breach of contract, what will be the likely result? a. The contract will be unenforceable because it is a violation of public policy. b. The contract will be enforced, because both parties are in pari delicto. c. Lucky will be able to have the contract rescinded and get back the payments he made to the judge. d. The judge will be ordered to pay the money to the government as a fine.
The contract will be unenforceable because it is a violation of public policy.
Alatan owns a building supply store in Russ County. His trade extends throughout River City, the largest city in Russ County, but not beyond the county limits. He sells his store to Hilary and, as part of the transaction, agrees not to engage in the same business anywhere in River City for a period of two years. In this case: a. The geographic restraint is reasonable. b. This agreement is unreasonable. c. The agreement unduly interferes with the interest of the public. d. The time limit is reasonable, but the geographic restraint is not
The geographic restraint is reasonable.
What are the two types of licensing statutes? How do they differ in their legal effect if violated?
The two types of licensing statutes are those which are regulatory in nature and those enacted in order to raise revenue. A regulatory licensing statute is one designed to protect the public against services provided by unqualified individuals. If violated, there can be no recovery for professional services rendered by a person not having the required license. A revenue-raising licensing statute is one designed solely to raise revenue. It does not seek to protect the public from services provided by incompetents. Accordingly, agreements by persons not having the license required by such a statute are enforceable.
Sarah is working hard on the mayoral campaign of Timothy. She thinks that just a few more votes could win the election, so she promises to pay her friend Violet $50 to register and vote. Violet does so, but Timothy loses the election, and Sarah now refuses to pay. a. This agreement is enforceable. b. This agreement is unenforceable and opposed to public policy. c. This is an agreement to obstruct the administration of justice. d. This is an unconscionable contract covered by the UCC.
This agreement is unenforceable and opposed to public policy.
Carl and Ron are both engaged in road construction work. They know that several jobs are going to be up for public bids, and agree between themselves that Carl will bid on one job and Ron will bid on the other, so that they both have work for the summer. When the bids are opened, Carl realizes that Ron has bid on both jobs. Ron is awarded both contracts. Carl now wants to sue Ron for breach of contract. a. Carl would probably win on the basis of promissory estoppel since he has detrimentally relied upon Ron's representation that he would not bid. b. Since Carl is less at fault than Ron, the court will likely award Carl damages. c. This is an agreement in violation of public policy that will not be enforced by the courts. d. This is an agreement obstructing the administration of justice that will not be enforced by the courts.
This is an agreement in violation of public policy that will not be enforced by the courts.
An agreement to refrain from a particular trade, profession, or business is enforceable if two requirements are met: that it protects a property interest of the promisee and that the restraint is no more extensive than is reasonably necessary to protect that interest. a. True b. False
True
An exculpatory clause attempts to excuse one from liability for her own tortious conduct. a. True b. False
True
B& B, Inc. pays an attorney to draft and lobby for a bill which will greatly lessen B & B's tax liability to the state and federal governments. B&B gives the attorney $20,000 in cash to pay legislators for taking the time to listen to him. This is an agreement which is a violation of public policy. a. True b. False
True
Carol Customer signs a consumer purchase agreement for a VCR in which she agrees to make monthly payments. In fine print on the back, the contract also provides that if she misses a payment, she will confess judgment and pay all costs necessary in enforcing the contract without raising any defenses against the lender. This is an unconscionable contract.
True
Donna is in her last semester of dental school. On weekends she cleans the teeth of her friends and relatives and then sends them a bill for $25. These are illegal contracts, because Donna is not yet licensed.
True
In cases involving the enforceability of covenants not to compete in employment contracts, courts must carefully balance the public policy favoring the employer's right to protect his business interests against the public policy favoring full opportunity for individuals to gain employment.
True
Procedural unconscionability involves scrutiny for the presence of "bargaining naughtiness."
True
Subject to a few exceptions, neither party to an illegal contract can sue the other for breach nor recover for any performance rendered.
True
The courts will not enforce an agreement declared illegal by statute.
True
The legal effect of a usurious loan varies from state to state. a. True b. False
True
The president of Big Bucks, Inc. pays a state official $500 to give the corporation's application for a government contract special consideration. This is an illegal contract.
True
A man and a woman make mutual promises to marry. Unknown to the woman, the man is already married. a. This is an agreement to commit a crime, which renders the agreement void. b. Both parties are in pari delicto. c. If the woman is unaware of the man's other marriage, she could pursue an action for money damages against him. d. Two of the above are correct, (a) and (c).
Two of the above are correct, (a) and (c). a. This is an agreement to commit a crime, which renders the agreement void. c. If the woman is unaware of the man's other marriage, she could pursue an action for money damages against him.
Distinguish between "unconscionable contracts" and "contracts of adhesion."
Unconscionable contracts are grossly unfair or unduly harsh. The doctrine of unconscionability permits the courts to resolve issues of unfairness with regard to either procedural or substantive unfairness. The doctrine with regard to contracts of adhesion is related to the doctrine of unconscionability in that it allows the courts to scrutinize standard form contracts offered on a "take-it-or-leave-it" basis for procedural or substantive unconscionability.
Briefly discuss the effect of illegality and the exceptions to the general rule.
With few exceptions, illegal agreements are unenforceable. As a general rule, where the parties to an illegal agreement are in pari delicto the courts will not aid either party. However, where one party withdraws prior to performance or is protected by statute, or where one party is not equally at fault or can make a claim of excusable ignorance, the courts may allow certain actions regarding the agreement.
Don has an employment contract with Dunkirk Ice Cream. He sells ice cream and novelty ice cream products. He has nine children and doesn't make enough money, so he decides to see if another dairy will hire him, too. "After all," he reasons, "most stores carry four or five different brands." His employment contract prohibits him from competing. If Don sells for another dairy in addition to Dunkirk, will he be in trouble under his contract? a. No, it is unenforceable as against public policy. b. Yes, it is likely to be enforceable during employment. c. No, the prohibition against competing is enforceable only after he quits Dunkirk. d. A court would have to rule on the enforceability of the covenant not to compete since courts are reluctant to enforce such covenants during a period of employment.
Yes, it is likely to be enforceable during employment.
You want to go sky diving and the business you plan to use requires you to sign an agreement including an extensive exculpatory clause. Which statement is correct? a. You would be able to sue if you got injured due to their negligence because these clauses are against public policy b. If you were injured during the dive due to the company's negligence, the exculpatory clause would excuse the sky dive company form liability for its tortious conduct c. The exculpatory clause is enforceable so you would not be able to sue if you were injured because of their negligence d. The exculpatory clause would not be enforceable if you did not understand what it meant when you signed the contract
You would be able to sue if you got injured due to their negligence because these clauses are against public policy
An agreement is illegal and unenforceable if its formation or performance is: a. criminal. b. tortious. c. contrary to public policy. d. all of the above.
all of the above a. criminal. b. tortious. c. contrary to public policy.
An agreement in a contract that attempts to excuse one party from liability for her own negligence is called: a. a clause obstructing the administration of justice. b. an exculpatory clause. c. a restraint of trade. d. an illusory promise.
an exculpatory clause.
In general, an agreement not to compete with an employer while employed is enforceable if: a. the purpose of the restraint is to protect the employer's business. b. the restraint is no greater than is reasonably needed to protect the employer's business. c. both (a) and (b). d. neither (a) nor (b).
both (a) and (b). a. the purpose of the restraint is to protect the employer's business. b. the restraint is no greater than is reasonably needed to protect the employer's business.
Archie bets his friend Jerry $100 that the Packers will win the next Super Bowl. This is an: a. unconscionable contract and therefore illegal. b. illegal wagering agreement. c. agreement to obstruct justice and therefore illegal. d. illegal restraint of trade.
illegal wagering agreement.
In general, if a promise is illegal: a. only the promisor can sue the promisee for breach and recover any performance rendered. b. only the promisee can sue the promisor for breach and recover any performance rendered. c. neither the promisor nor the promisee can sue the other for breach and recover any performance rendered. d. both the promisor and the promisee can sue the other for breach and recover any performance rendered.
neither the promisor nor the promisee can sue the other for breach and recover any performance rendered.
CPA: Todd is a licensed real estate broker in Ohio. One of Todd's largest clients, Sun Corp., contracted in writing with Todd to find a purchaser for its plant in New York and agreed to pay him a 6% commission if he were successful. Todd located a buyer who purchased the plant. Unknown to Todd, New York has a real estate broker's licensing statute which is regulatory in nature, intended to protect the public against unqualified persons. Todd violated the licensing statute by failing to obtain a New York license. If Sun refuses to pay Todd any commission and Todd brings an action against Sun, he will be entitled to recover: a. nothing. b. a fee based on the actual hours spent. c. the commission agreed upon. d. out of pocket expenses only.
nothing.
A regulatory licensing statute is one intended to: a. raise revenue. b. protect the public against unqualified persons. c. prevent gambling. d. prevent excessive rates of interest.
protect the public against unqualified persons.
Where one party to an illegal contract is less at fault than the other, she may: a. enforce the entire contract. b. receive no assistance from the court at all. c. recover out-of-pocket expenses only. d. recover payments made or property transferred.
recover payments made or property transferred.
A(n) ____ is a measure designed to protect the public from unqualified practitioners. a. exculpatory clause b. revenue license c. regulatory license d. usury statute
regulatory license
John operates a small repair business and is in desperate need of a certain type of building material. He obtains the material from a large corporation, but is charged a grossly unreasonable price and is forced to buy other material he does not need. In view of the buyer's unequal bargaining power and unreasonable terms of the contract, this may be a case of: a. in para delicto. b. partial illegality. c. substantive unconscionability. d. procedural unconscionability.
substantive unconscionability.
In considering whether a covenant not to compete included in the sale of a business is reasonable, courts will consider all of the following factors except: a. the geographic area covered. b. the time period for which the restraint is to be in effect. c. the hardship imposed on the promisor. d. the price that the promisee paid for the business.
the price that the promisee paid for the business.
A __________ is a law establishing a maximum rate of permissible interest for which a lender and borrower of money may contract. a. wager b. usury statute c. Sunday statute d. None of the above.
usury statute
All of the following situations represent exceptions to the strict rule of unenforceability of illegal agreements except: a. where a party to the illegal agreement withdraws from the transaction prior to the performance. b. where one of the parties to the agreement is a party protected by the statute violated. c. where the parties are not equally at fault. d. where the parties are in pari delicto.
where the parties are in pari delicto.
Rorzex, Inc. entered into a contract with Denzil under the terms of which Denzil would receive $20,000 if he stole trade secrets from the leading competitor of Rorzex. Denzil performed his end of the agreement by delivering the trade secrets. Rorzex now refuses to pay Denzil for his services. Denzil: a. may recover based upon the express contract of the parties. b. may recover based upon a quasi-contractual theory in order to prevent the unjust enrichment of Rorzex. c. will be unable to recover, because this is an illegal contract. d. will be able to recover based upon promissory estoppel, because he has detrimentally relied upon the promises made by Rorzex.
will be unable to recover, because this is an illegal contract.
