Chapter 10 Legal Purpose and Proper Form. Which Agreements are Illegal? Agreements that involve contracting for an illegal act generally are void and.

Chapter 10

Legal Purpose and Proper Form

Which Agreements are Illegal?

Agreements that involve contracting for an illegal act generally are void and unenforceableIllegal LotteriesAgreements to pay usurious interestAgreements involving illegal discriminationAgreements that obstruct legal proceduresAgreements made without required competency

licenseAgreements that affect marriage negativelyAgreements that restrain trade unreasonablyAgreements not to compete

Illegal LotteriesMost states either forbid or regulate

gamblingUsually they have statues which make

gambling agreements, typically termed illegal lotteries, void.

Lottery has three elements:PrizeChanceConsideration

Wager—bet on the uncertain outcome of an event

Regulated LotteriesMost states have legalized various forms of

gambling under regulated conditions:Casino—most forms of traditional gaming are

permittedPari-mutual betting—form of betting in which

those who bet on the winner of a horse race share the total prize pool

State-run lotteries—often with millions in the jackpot to be split between the winner(s) and state educational institution

Bingo games and pull-tab betting—permitted in many states when conducted by licensed institutions for financing charitable, religious, or educational projects

Agreements to Pay Usurious Interest

Almost all states provide that, with certain exceptions, lenders of money may not charge more than a specified maximum rate of interestGenerally, penalties specified by these

statutes varyIn some states lenders cannot collect some or all of

the interestBorrower must pay principal

Maximum varies among states, 18% is a common maximum

Usury—lending money at a rate higher than the state’s maximum allowable rate

Criminal Loan Sharks—illegally charge extremely high interest rates, often 50% per month

Legal InterestLegal rate of interest—specified by state

statuteAbout ½ of states = 7% per yearOther states = 8-12% per year

Pawnbrokers/licensed loan companiesSmall loan rate of interest36% per year on loans up to $2,000Dollar amount loaned is relatively small,

overhead cost per dollar loaned is highRisk of loss from defaults is highProtects people from loan sharks

Agreements Involving Illegal Discrimination

Some agreements are unenforceable because they violate anti-discrimination statutesExample: an agreement between a local motel chain

and a local manager not to accept guests of a particular race or national origin would be unenforceable because it violates the 1964 Civil Rights Act

Agreements may also be illegal as violations of the ConstitutionExample: a contract between a residential

subdivision developer and a home buyer providing that the buyer would not sell to a member of a particular race would be unenforceable because it violate the Fourteenth Amendment to the Constitution

Agreements that Obstruct Legal Procedures

Agreements that delay or prevent justice are voidExamples:

Pay non-expert witness in a trial to testify, or pay for false testimony

Bribe jurorsCompounding a Crime--Refrain from informing on

or prosecuting an alleged crime in exchange for money or other valuable consideration

A court or prosecutor may make a penalty dependent upon a criminal’s making restitutionThe victim may not make reporting a crime

dependent on restitution

Agreements Made Without a Required Competency License

All states require that persons in certain occupations and businesses pass exams and receive competency licenses to ensure that they can perform adequately

Persons who lack the required competency license may not enforce the contracts they make in doing the regulated work

In contrast, if the license is a REVENUE LICENSE, whose purpose is only to raise revenue and not protect the public, contracts made by unlicensed persons are valid

Occupations requiring COMPETENCY LICENSES:•Plumbers•Electricians•Beauticians/barbers•Teachers•Physicians

•Lawyers•Pharmacists•Real estate brokers•Insurance agents•Building contractors

Agreements that Affect Marriage Negatively

The law encourages marriage and family life by making agreements that harm or interfere with marriage unenforceable

Examples:Paying a citizen to marry an illegal alien to

obtain citizenshipPaying for your child not to marry someone

or at allPaying for someone to divorce their spouse

Agreements that Restrain Trade Unreasonably

The U.S. economic system is based on the concept of free and open competitionThis creates profits for producers and benefits for

consumersState and federal laws seek to prevent monopolies and

combinations that restrict competition unreasonablyExamples of Agreements that Restrain Trade:

Price Fixing—when competing firms agree on the same price to be charged for a product Injures consumers--deprives them of the lower prices which

competition would produceResale Price Maintenance—wanting retailers to sell their

product at a particular priceCan lead to price fixing

Allocation of Markets—competitors divide markets between themselves

Agreements not to CompetePrice fixing and market allocations are agreements

not to compete. One type of agreement not to compete is sometimes enforceable. Employees may agree that they will not compete with their employer after the employment terminates.

These agreements are illegal if they are unreasonable in:Time period for the limitationGeographic area to which the limitation appliesEmployer’s interest protected by the limitation

Examples:Not to compete for 20 yearsNot to compete anywhere in the U.S.

When Will the Courts Enforce Illegal Agreements

Most illegal contracts are void and unenforceableWhen the connection between the illegality and

the agreement is slight or a party is relatively innocent of the wrongdoing, or both, the law will allow restitution or the agreement to be enforced in court

Examples:Protected victims

When the illegal agreement is created by fraud, duress, misrepresentation, or undue influence, the victim may obtain restitution

When the law that was violated was designed to protect a party to the agreement (blue sky laws—prohibit the sale of worthless stocks and bonds)

When Will the Courts Enforce Illegal Agreements

Examples continued:The excusably ignorant

Does not know that the contract is illegalThe other party knows that the transaction is illegalThe illegality is minorCan either enforce the legal part of the contract or

obtain restitutionRescission prior to the illegal act

If a party rescinds before the illegal act occurs, then restitution will be available

This is designed to create an incentive to stop illegal acts

When Will the Courts Enforce Illegal Agreements

Examples continuedDivisible Contracts

Illegal contracts usually contain a combination of legal and illegal provisions

Courts may enforce the legal part of the contract if it is divisibleDIVISIBLE—separate consideration is given for the legal and

illegal parts INDIVISIBLE—cannot give separate consideration because

everything is tied togetherUnconscionability—when there is a grossly unfair contract that

parties under ordinary circumstances would not acceptProcedural unconscionability—unfair creation of a contractSubstantive unconscionability—unfair terms in the agreement

o Courts can refuse to enforce the contract or they can enforce the legal part

Why Have a Statute Of Frauds?Statute of Frauds

Although oral contracts are generally valid and binding, because they are subject to fraudulent claims, the law requires that several of the most important types of contracts be placed in writing to be enforceable in court

Examples:Transfer an interest in real property (land, buildings,

and things permanently attached to them) must be in writing

Contracts within the Statute of Frauds

A contract is said to be within the Statute of Frauds if it is required to be in writing

Examples:Contracts to buy and sell goods for a price of

$500 or moreContracts to buy and sell real property or any

interest in real propertyContracts that require more than one year to

completePromises to pay the debt or answer for a

legal obligation to another personPromises to give something of value in return

for the promise of marriage

Contracts within the Statute of Frauds If a contract is within the Statute of Frauds, but there is either

no writing or no signature, how courts treat the parties depends on the extent of contractual performanceExecuted Contract

one that has been fully performedBoth parties have done all they promised to doCourts leave both parties where they are at—neither party can reverse the

contractExecutory Contract

One that has not been fully performedSomething agreed upon remains to be done by one or both of the partiesAn executory contract within the Statute of Frauds, but not signed in writing, is

unenforceableAn executory contract in violation of the Statute of Frauds—restitution is

available If a benefit was conferred in reliance on the oral agreement, its value can be

recovered by suing based on quasi-contract o Quasi-contract—some element of an enforceable contract is mission, yet

courts award money to prevent the unjust enrichment of one party

Contract within the Statute of Frauds

Generally, a writing need not utilize any special form to satisfy the Statute of Frauds as long as it contains certain key elements:Statute of Fraud Requirements:

Names of the partiesSubject matter descriptionQuantityPrice SignatureOther essential terms (time, delivery method, terms of

payment,etc.)UCC Requirements:

Quantity of goodsThat a contract has been created between the two parties

Only the parties whose signatures actually appear on the contract may be sued for enforcement

Types of Contracts within the Statute of FraudsTo be enforceable under the Statute of Frauds, five

types of executory contracts must be evidenced by a writing and signed by the party against whom the contract is to be enforcedContract for the sale of goods for $500 or more

Exceptions according to the UCC:When goods are ordered to be specially manufactured and

they are not suitable to be sold to others in the ordinary course of the seller’s business

When goods have been ordered and paid for and the seller has accepted payment

When goods have been received and accepted by the buyerWhen the party against whom enforcement is sought

admits during legal proceedings that the oral contract was made

Types of Contracts within the Statute of Frauds

Contract to sell an interest in real propertyTransfers of real property or of lesser

interests (lease, right to pump oil or cut timber) must be in properly signed writing to be enforceableExceptions:

The court will enforce oral contracts if the seller has delivered the deed or if the buyer has also done all of the following:o Made partial or full paymentso Occupied the lando Made substantial improvements to the land

Types of Contracts within the Statute of Frauds

Contracts that Require more than one year to completeCourts will not enforce a contract that cannot

be performed within one year unless there is a signed writing to prove the agreementThe year begins at the time the contract was made,

not at the time the contractual performance is to begin

This time provision does not apply to agreements that might be executed within one yearThe test is not whether the agreement is actually

performed within one year, but whether there is a possibility of performance within one year

Types of Contracts within the Statute of FraudsContract to pay a debt or answer for another’s debt

Requires a writing for a promise to answer for the debt or default of anotherCollateral promise—promising to pay if someone else does not

Must be in writingPrimary promise—promising to pay directly

Does not need to be in writingException—Main Purpose Rule

A third party is liable for an oral promise to pay another’s debt if the main purpose of the promise serves the promisor’s own interest

Example: owner of a house under construction is anxious to see it completed. After the building contractor fails to pay on time, the driver of a delivery truck refuses to unload a shipment of lumber. If the homeowner orally promises to pay for needed the supplies, the homeowner cannot defend using the Statute of Frauds

Types of Contracts within the Statute of Frauds

Contract for which the consideration is marriageA signed writing is required for agreements in

which one party promises to marry in return for something other than the other’s promise to marryIf Alice agrees to marry Buck because he promised

to deed his house to her, this is within the Statute of Frauds

If a parent of the woman promises to pay a dowry to the man, it must be in writing to be enforceable

How are contracts interpreted?At times parties to a written agreement claim that

it does not include everything that was agreed upon or is not clear about such terms.

In court these claims are settled either by an examination of the document itself or by a set of rules specifically devoted to the interpretation of contracts

Integration Clause—a contract clause stating that both parties agree that the terms in the written contract constitute the entire and final agreement“it is agreed that the terms written here constitute

the entire and final contract between the parties”

Specific Rules of Interpretation Analysis

The first thing a court will do is interpret the contract in terms of the parties’ principal objectiveBy looking at the main objective, courts can see

which clauses should prevail over othersIf an agreement can be interpreted in two ways, the

courts will choose the way that renders the agreement a contract

Conflicting TermsIf there is a conflict between a printed form contract

and something typewritten or handwritten thereon, the later writings determine the contracts meaning

Specific Rules of Interpretation

WordsThe plain and normal meaning of ordinary words will be used to

determine the meaning of the contractPrior relationships of the parties may indicate how the words

should be interpretedLegal and other terms are given their technical meaning unless

the contract as a whole shows that a different meaning is intended

Authors of AmbiguityCourts will interpret ambiguities against the party who drafted

the contractOften consumers are asked to accept and sign contracts of

adhesionCredit purchases and life insurance policiesPrepared by stronger parties with the help of skilled lawyersTerms are not negotiableCourts interpret ambiguity against the party who drafted the contract

Specific Rules of InterpretationImplied Reasonableness

Contracts often include implied terms as a matter of reasonablenessPromised services must be performed with

reasonable care and skillWhen no time is mentioned, a reasonable time is

allowed

Parol Evidence RuleThis rule makes the final writing the source of

evidence about the terms of the contractConsists of words spoken prior to the

execution of the final writing or at the time of signingGenerally inadmissible in court

Specific Rules of Interpretation

Exception to the Parol Evidence RuleTo clarify ambiguities in the written agreementIf the written contract was not intended to be a

complete agreementIf a condition necessary to the existence of the

contract never occurredIf fraud, forgery, illegality, mistake, or

misrepresentation occurredTo show the parties reached another agreement or

terminated the contract under consideration after executing the written contract

To show that the parties contract is voidable because a party lacked contractual capacity