15-1McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter 15

Illegality

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Illegality

If yesIf enforceable

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Introduction

1) Illegality – contract unenforceable if formation or performance is illegal or contrary to public interest

2) Types of Illegalitya) Behavior violates statute/rule of common lawb) Made illegal by statutec) Contrary to general rule of public policyd) Surrogacy agreements against public policy

3) Presumption of legality – resolved in favor of legality of agreement unless parties intended illegal bargain (rebuttable presumption)

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Effect of Illegality

• General Rule – hands off illegal agreements – unenforceable on their face

• Ignorance of Fact or Special Recognition – courts have allowed recovery if one/both parties ignorant of facts that made it illegal– Recovery only allowed for period before illegality discovered– Recovery not allowed if not immoral behavior or threat to

public welfare– If one party’s actions are illegal by violation of a statute

applying only to that party, the other party can still recover

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Effect of Illegality

• Rights of Protected Parties – party protected by a statute can enforce contract or recover consideration

• Rescission before Performance of Illegal Act – the party that rescinds before illegal act occurs can recover consideration

• Illegal & Divisible Contracts– If contract divisible courts enforce legal parts– If indivisible, entire contract is “tainted,” and thus

unenforceable– If the main purpose of the contract can be performed without

enforcement of illegal section, contract is enforceable (but illegal provision is not)

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Contracts to Commit Illegal Acts

• Agreements to Commit Crimes – illegal

• Agreements to Commit Torts – illegal

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Contracts Made Illegal by Statute

• Wagering Statutes – problem is to differentiate:– Wagering – straight gamble– Risk-shifting (ex. – insurance with insurable interest)– Speculative bargaining (ex. – futures contracts)

• Statutes Declaring Bargains Void/Voidable– Usury– Sunday “Blue Laws”

• Regulatory Statutes– Require licenses – protect the public – contracts not

enforceable– Revenue-raising – no public protection, contracts

enforceable

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Contracts Made Illegal by Statute

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Contracts Contrary to Public Policy

• Idea of Public Policy – what court believes is in best interests of society

• Contracts Injurious to Public Service – public interest served when public officials fully & faithfully perform duties

• Contracts to Influence Fiduciaries – fiduciary (person in position of trust/confidence) induced to breach fiduciary duty

• Exculpatory Clauses – provision that attempts to relieve one party from liability – contracts with exculpatory clauses may be enforceable where no duty to public and both parties freely and knowingly agree (ex. – assumption of risk on ski tickets)

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• Contracts in Restraint of Trade – public interest best served by free competition, some situations where limiting competition justifiable, sole purpose or ancillary

• Unequal Bargains– Doctrine of freedom of contract– Unconscionable contracts– Contracts of adhesion

• Code and Unconscionable Contracts – unconscionable not defined – courts less likely to find contracts between merchants unconscionable

Contracts Contrary to Public Policy(cont’d)

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Common ContractsContrary to Public Public Policy