Essentials of Business Law, 9th edition
INSTRUCTOR’S MANUAL
Chapter 12 Legal Purpose of Contracts
LESSON OVERVIEW
While the previous chapters discussed the various parameters to bear in mind while parties enter into
contracts, Chapter 12 contemplates on the legal purpose of contracts. The chapter discusses in detail the
legality of purpose in relation to public interest while classifying the various illegal agreements and
agreements in violation of statutes and public policies. The Sherman Antitrust Act and the
Robinson-Patman Act are also discussed in detail for the purpose of understanding the major laws
governing illegal restraint of trade and the instances where restraints of trade are legally enforceable.
Finally, students’ understanding of the topics is evaluated through objective-type questions, discussion
questions, and case scenarios.
CHAPTER OUTLINE
A. LEGALITY AND THE PUBLIC INTEREST (p. 184)
1. Classification of Illegal Agreements (p. 184)
2. Effect of Illegality (p. 184)
B. AGREEMENTS IN VIOLATION OF STATUTES (p. 184)
1. Agreements Made on Sundays or Legal Holidays (pp. 184-185)
2. Gambling and Wagering Agreements (p. 185)
3. Usurious Agreements (p. 185)
4. Unlicensed Transactions (p. 186)
C. AGREEMENTS AGAINST PUBLIC POLICY (p. 186)
1. Agreements That Obstruct or Pervert Justice (pp. 186-187)
2. Agreements That Restrain Marriage (p. 187)
3. Agreements That Interfere with Public Service (p. 187)
4. Agreements to Defraud Creditors and Other Persons (p. 188)
5. Exculpatory Clauses (p. 188)
D. ILLEGAL RESTRAINTS OF TRADE (pp. 188-189)
1. Sherman Antitrust Act (p. 189
2. Robinson-Patman Act (p. 189)
E. LEGAL RESTRAINTS OF TRADE (p. 190)
1. Government-Granted Monopolies (p. 190)
2. Private Franchises (p. 190)
3. Zoning Regulations (p. 190)
4. Environmental and Safety Regulations (p. 190)
F. CHAPTER SUMMARY (pp. 191)
G. CHAPTER ASSESSMENT (p. 191)
1. Matching Key Terms (pp. 191-192)
2. True/False Quiz (pp. 192-193)
3. Discussion Questions (p. 193)
4. Thinking Critically About the Law (p. 194)
5. Case Questions (p. 195)
6. Case Analysis (pp. 195-196)
7. Legal Research (p. 197)
KEY TERMS
Key terms are listed at the beginning of the chapter, posted in the student textbook margins, and placed
in bold in the copy. They are listed here for your quick reference.
§ blue laws (p. 184)
§ Sunday agreement (p. 184)
§ gambling agreement (p. 185)
§ interest (p. 185)
§ usury (p. 185)
§ unlicensed transaction (p. 186)
§ champerty (p. 186)
§ exculpatory clause (p. 188)
§ restraint of trade (p. 189)
§ monopoly power (p. 189)
§ Sherman Antitrust Act (p.189)
§ Robinson-Patman Act (p.189)
§ government-granted franchise (p.190)
§ franchisor (p.190)
§ franchisee (p.190)
LEARNING OUTCOMES
The chapter Learning Outcomes will help you and the students discover the concepts and information
that should be understood upon completion of the chapter. You may want to access the PowerPoint
(PPT) slides for Chapter 12 when you begin the study of the chapter and discuss each Learning
Outcome. Each Learning Outcome will be covered separately in the Instructor Notes, but they are
shown here in total as an overview of the sections being presented in Chapter 12. The corresponding
text page numbers and PPT slides are listed next to each objective. These slides should be used to
reinforce the main points of the lecture.
After completing this chapter, the students will be able to:
1. Discuss legality of purpose in relation to public interest, and classify illegal agreements into three
major categories. (p. 184, PPT slides 2-5 )
2. Identify four kinds of agreements that are in violation of statutes. (pp. 184-186, PPT slides 6-10)
3. Identify five kinds of agreements that are in violation of public policy. (pp.186-188, PPT slides
11-17)
4. Explain the provisions of two major laws governing illegal restraint of trade: the Sherman
Antitrust Act and the Robinson-Patman Act. (pp. 188-189, PPT slides 18-20)
5. Discuss four instances where restraints of trade are legally enforceable. (p. 190, PPT slides 21-24)
LECTURE OUTLINE
A. LEGALITY AND THE PUBLIC INTEREST
Legality of purpose is one of the essential elements of an enforceable contract. Although the parties to a
contract are legally competent and have reached mutual agreement, the law still requires that the
purpose of the agreement be legal and not contrary to the public interest.
1. Classification of Illegal Agreements
There are three broad classifications of illegal agreements: (1) agreements that are
contrary to the common law, (2) agreements that have been declared illegal by statute,
and (3) agreements the courts have found to be against the security or welfare of the
general public.
2. Effect of Illegality
An agreement with an illegal purpose is usually void and unenforceable. However, if the
contract is divisible—that is, if it has several unrelated parts—and if one or more parts
have a legal purpose, then the components are enforceable.
B. AGREEMENTS IN VIOLATION OF STATUTES
Agreements that violate government statutes are not enforceable by the courts.
1. Agreements Made on Sundays or Legal Holidays
Some state statutes and local ordinances, referred to as blue laws, regulate the creation
and performance of certain types of contracts on Sundays and legal holidays. Many of
these restrictions originate in religious customs and practices.
2. Gambling and Wagering Agreements
A gambling agreement is one in which performance by one party depends on the
occurrence of an uncertain event.
3. Usurious Agreements
If a loan is made at an interest rate higher than that allowed by state law, the lender is
guilty of usury, which is defined as charging interest higher than the law permits.
4. Unlicensed Transactions
An agreement with a person who does not have the required license is an unlicensed
transaction and is generally illegal if the purpose of the statute is regulatory and
enforcement of the licensing requirements is clearly in the public interest.
C. AGREEMENTS AGAINST PUBLIC POLICY
Some agreements are unenforceable because they are contrary to the interests of the public such as
those agreements that obstruct or pervert justice, agreements in restraint of marriage, agreements that
interfere with public service, agreements that defraud creditors and other persons, and agreements that
contain exculpatory clauses.
1. Agreements That Obstruct or Pervert Justice
Among the kinds of agreements that obstruct or pervert justice are agreements to
conceal a crime or not to prosecute a criminal once he returns the stolen property or an
agreement to encourage a lawsuit in which one or more of the parties have no legitimate
interest. Such agreements are called champerty. Other agreements that are against
public policy are agreements to give false testimony or suppress evidence, agreements to
bribe a juror or a court official, and agreements to refrain from testifying as a witness in
a legal action
2. Agreements That Restrain Marriage
Agreements in restraint of marriage are void.
3. Agreements That Interfere with Public Service
Agreements that attempt to bribe or interfere with public officials, obtain political
preference in appointments to office, pay an officer for signing a pardon, require one of
the parties to the agreement to break a law, or influence a lawmaking body for personal
gain are examples of agreements that are illegal because they interfere with public
service.
4. Agreements to Defraud Creditors and Other Persons
Because agreements to defraud lack the element of legality of purpose, they are void and
unenforceable.
5. Exculpatory Clause
An exculpatory clause is a statement in a contract that releases one party from liability
resulting from his or her own negligence throughout the performance of the contract.
Exculpatory clauses are contrary to public policy; one party is protected from the
consequences of his or her own negligence or willful actions, while the other party is not
allowed to recover his or her losses. Exculpatory clauses are illegal when used by
companies in a business directly related to the public interest, such as banks, public
utilities, and transportation providers.
D. ILLEGAL RESTRAINTS OF TRADE
Unless specifically permitted by law, agreements to suppress or eliminate competition are illegal and
unenforceable. These kinds of agreements are said to be in restraint of trade.
1. Sherman Antitrust Act
In 1890, Congress passed the Federal Antitrust Act, also known as the Sherman
Antitrust Act. This law and several amendments to it are still vigorously enforced
against large and small businesses. It forbids certain agreements that tend to
unreasonably inhibit competition, fix prices, allocate territories, or limit production.
2. Robinson-Patman Act
The Robinson-Patman Act of 1936, which amended earlier antitrust legislation, makes
it unlawful to discriminate, directly or indirectly, in matters involving product pricing,
advertising, and promotion. It specifically prohibits sellers from discriminating among
different purchasers of goods of like grade and quality under certain conditions. The
purpose of the act is to ensure that no one customer has an advantage over others.
E. LEGAL RESTRAINTS OF TRADE
Although federal and state legislation and many court decisions encourage competition, there are times
when agreements in restraint of trade are in the public interest and are legally enforceable.
1. Government-Granted Monopolies
A government-granted franchise is another form of legal monopoly in which a state or
the federal government grants a firm or person a license to conduct a specific service.
2. Private Franchises
A private franchise is a special kind of business organization involving a contractual
relationship between a franchisor (the parent firm) and a franchisee (the independent
company). In the case of a private franchise, the contractual relationship provides that
the franchisor will supply certain services, such as management consulting, to the
franchisee and will allow the franchisee to use the franchisor’s name, join with others in
national advertising, and secure other benefits.
3. Zoning Regulations
Zoning regulations are intended to provide security for the citizens of a community;
they also may act as legal restraints of trade because they restrict where and how
businesses may operate.
4. Environmental and Safety Regulations
Safety regulations serve to protect the health and welfare of the general population of a
community, customers, and employees. They serve as legal restraints of trade because
they place limits and restrictions on how a firm may operate.
INSTRUCTOR NOTES
A resulting answer or explanation is provided below for each Learning Outcomes in Chapter 12. Every
outcome is also mapped to corresponding text page numbers, PPT slides, and relevant chapter
assessment exercises and activities for ease of reference and use.
LO1. Discuss legality of purpose in relation to public interest, and classify illegal agreements into
three major categories.
Although the parties to a contract are legally competent and have reached mutual agreement, the law
still requires that the purpose of the agreement be legal and not contrary to the public interest. The three
major categories of illegal agreements are (a) agreements that are contrary to the common law, (b)
agreements that have been declared illegal by statute, and (c) agreements that have been found by the
courts to be against the security or welfare of the general public.
Text Pages: 184
PowerPoint: Slides 2-5
Discussion Questions: 22, 24
Case Analysis: 38
LO2. Identify four kinds of agreements that are in violation of statutes.
Four kinds of agreements that violate statues are (a) agreements made on Sundays or legal holidays, (b)
gambling and wagering agreements, (c) usurious agreements, and (d) unlicensed transactions.
Text Pages: 184-186
PowerPoint: Slides 6-10
Discussion Questions: 23, 25
Thinking Critically About the Law: 28-29
Case Questions: 34-35
Case Analysis: 36, 38
LO3. Identify four kinds of agreements that are in violation of public policy.
Four kinds of agreements that violate public policy are those that (a) obstruct or pervert justice, (b)
restrain marriage, (c) interfere with public service, (d) defraud creditors and other persons, and (5)
contain exculpatory clauses.
Text Pages: 186-188
PowerPoint: Slides 11-17
LO4. Explain the provisions of two major laws governing illegal restraint of trade: the Sherman
Antitrust Act and the Robinson-Patman Act.
The Sherman Antitrust Act forbids agreements that tend to unreasonably lessen competition, fix prices,
allocate territories, or limit production. The Robinson-Patman Act makes it unlawful to discriminate,
directly or indirectly, in matters involving product pricing, advertising, and promotion.
Text Pages: 188-189
PowerPoint: Slides 18-20
Thinking Critically About the Law: 31, 33
Case Analysis: 37
LO5. Discuss four instances where restraints of trade are legally enforceable.
Restraints of trade are legally enforceable in the following instances: (a) government-granted
franchises, legal monopolies in which a state or the federal government grants a person or firm a
license to conduct a specific—usually essential—business; (b) private franchise, special kinds of
business organizations involving contractual relationships between franchisors and franchisees; (c)
zoning regulations, legal restraints of trade that restrict where and how businesses may operate; and (d)
environmental and safety regulations, statutes to protect the health and welfare of the general
population.
Text Pages: 190
PowerPoint: Slides 21-24
Discussion Questions: 26, 27
Thinking Critically About the Law: 30, 32