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CHAPTER 15
ILLEGALITY
I. OBJECTIVES:
This chapter is designed to teach students about the circumstances under which a contract cannot
be enforced because it violates public policy. After reading the chapter and attending class, a
student should be able to:
A. Explain the concept of illegality as it is used in contract law.
B. Determine when a contract that violates the language or policy of a statute is likely to be
illegal.
C. Analyze whether a given noncompete clause is likely to be enforceable.
D. Analyze whether a given exculpatory clause is likely to be enforceable.
E. Explain the concept of unconscionability and identify the circumstances that make a contract
unconscionable.
F. Determine the effect of illegality in a given scenario.
II. ANSWER TO INTRODUCTORY PROBLEM
A. Yes. This problem is based on an actual case, Wilson v. Kealakekua Ranch, Ltd., 551 P.2d
remedy.
D. No. The Ranch received the value that it was seeking from Wilson and Wilson did not
III. SUGGESTIONS FOR LECTURE PREPARATION:
A. Introduction
1. Discuss the meaning of “illegality” in contract law and explain that “illegal” often means
criminal law.
2. Explain that when a contract is held to be illegal, courts generally refuse to enforce it
contract and was supported by consideration.
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Coma Corporation v. Kansas Department of Labor (p. 435): In this case, an
undocumented worker sued his former employer for earned but unpaid wages under the
Points for Discussion: What conflicting public policies are involved in this case? How
worker’s compensation?
4. Note the different functions courts engage in when they determine whether a contract
was illegal (interpreting statutes, weighing the strength of various policies, declaring
policies of their own creation).
B. Agreements in Violation of Statutes
1. Agreements Declared Illegal by Statute
a. Discuss usury statutes, Sunday laws, and wagering statutes. Make it clear that these
risk-shifting agreements.
Example: Pepsi Cola Bottling Co. of Luverne, Inc. v. Coca-Cola Bottling Co.,
game was not a lottery).
2. Agreements in Violation of Public Policy Manifested in Statute
a. Discuss how public policy may be manifested in a statute, even though the statute
does not expressly address the validity of contracts. A good example would be a
statute providing criminal penalties for acting as a real estate broker without a
Example: Problem Case #6 [unlicensed professional corporation].
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of the case to a large extent. Distinguish regulatory statutes from revenue raising
statutes; give examples of each. Make the point that avoiding forfeiture is also
important.
Additional Example: Contrast Problem Case # 3 with the Introductory Problem.
Example: Lavine Construction Co. v. Johnson, 101 Ill. App. 3d 817, 428 N.E.2d
1069 (1981). There, a contractor who was obligated to perform building and
electrical services hired a subcontractor to do the electrical work. The subcontractor
failed to obtain a permit for electrical work from the City of Chicago. The electrical
permits.
3. Contracts in Violation of Public Policy as Declared by Courts
a. Note that courts have traditionally had broad powers to declare public policy. Before
the “age of codification,” courts often had the primary responsibility of doing so, at
b. Discuss how public policy changes with changing social, economic, and
technological climates. For example, ask the class how they think courts would have
treated contracts between unmarried cohabitants 100 years ago.
c. Discuss the policy favoring free competition. Illustrate some contracts that might
restrain competition. Give some examples of ancillary covenants not to compete, and
employment contracts than in contracts for the sale of businesses.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
appliance-sales business during his 14 years with Clark’s. In 2004, Smith signed a
competitor of Clark’s that resides within 50 miles of Clark’s. The court held that
although the non-compete served Clark’s legitimate business interest, the non–
compete was far too broad and indivisible in nature, rending the “blue pencil
doctrine” inapplicable and the entire provision unenforceable.
NCA’s.
d. Discuss exculpatory clauses, giving examples of the circumstances in which they are
often used. Tell why they are vulnerable to attack on public policy grounds. Explain
the standards that are used to determine whether an exculpatory clause will be
upheld.
subsequently entered into a standard purchase and sale agreement with the Tribunas.
Within the standard form, the Sellers made no representations or warranties. Upon
closing of the deal, De Wolfe realized the property was not a “Business B” and, as a
result, could not use the property for his intended purposes. The court held that
upon.
Additional Example: Problem Case #8.
4. Unfairness in Contracts: Unconscionability and Contracts of Adhesion
a. Note that classical contract law did not normally concern itself with the fairness of a
contract, so long as the contract was not induced by fraud, misrepresentation, duress,
b. Point out that the doctrine of unconscionability is a significant departure from the
posture taken by classical contract law toward fairness in contracts. Why would
days of industrialization).
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c. Discuss the provisions of UCC 2-302. Note how the definition of unconscionability
is left open.
substantive aspects of unconscionability.
Moore v. Woman to Woman Obstetrics & Gynecology (p. 447): Moore went to the
doctor for care for her high risk pregnancy. At her first appointment, she completed
and signed a number of forms, including a lengthy arbitration agreement that
purported to bind her husband and unborn child as well as Moore. The Moores later
What facts indicate substantive unconscionability? Should the doctor’s office have
the responsibility to verbally explain the arbitration clause, or should Monica have
the responsibility to read what she was signing and ask questions if she didn’t
understand?
knowledge and bargaining power.
f. Note how the concept of unconscionability has been adopted by courts in many cases
outside the reach of Article 2 of the UCC (e.g., landlord-tenant relationships).
Example: Weaver v. American Oil Co., 276 N.E.2d 144 (Ind. 1971) (exculpatory
discussion).
g. Discuss the consequences of a finding of unconscionability.
h. Discuss the meaning and effect of contracts of adhesion. Note that a contract of
adhesion can be conceptualized as a particular type of unconscionable contract.
Contracts of adhesion may be analyzed using the language of unconscionability as
offeree has reason to know of.
Example: Problem Case #2.
i. Ethics in Action (p. 449): This question is based on Murphy v. McNamara, 416 A.2d
170 (Conn. Super. Ct. 1979). There, the court emphasized the inequality of
bargaining power here and the unconscionably high sales price. It stated that, “[a]n
that McNamara’s disclosure of the total contract price would resolve the problem of
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taking advantage of Murphy’s lack of sophistication. On the other hand, it is
contracting parties.
C. The Effect of Illegality
1. Discuss the general rule of “hands-off-illegal bargains.” What purpose does such a rule
serve?
Example: Problem Cases #4 and 6.
2. Discuss the exceptions to the “hands-off” rule.
that there would be some delay in obtaining the citizenship documents due to the tardy
payment. In February 2007, Alvarado convinced Gamboa to fly to the U.S. to obtain his
were all swindled by “Castellanos.” The court held that because the plaintiffs were not in
pari delicto with the defendants that they engaged in the illegal services for. The policy
IV. RECOMMENDED REFERENCES:
L. REV. 485 (1967).
C. James C. Koslowski, Liability Waivers and Releases Overview: Can You Say
“Exculpatory?” http://classweb.gmu.edu/jkozlows/p&r396.htm
V. ANSWERS TO PROBLEMS AND PROBLEM CASES:
1. The employees. The court noted that the plaintiffs would have a legitimate business interest
in protecting its proprietary system through a restrictive covenant if the covenant was
concerns regarding the enforcement of non-competition agreements are echoed throughout
the opinion: non–competition agreements “make it possible for an employer to hire and train
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
quit their current job with Redbull, preventing them to engage in any similar activities, and
causing 5/6 defendants to leave the country was inequitable. NASC Services, Inc. v. Jervis,
2008 WL 2115111 (D.N.J.).
2. No. The court stated that “[t]he form is a standardized contract offered to Broemmer on a
‘take it or leave it’ basis. In addition to removing from the courts any potential dispute
condition of treatment.” The contract terms were beyond the reasonable contemplation of
Broemmer, who was under a great deal of stress and was not experienced in commercial
1992).
3. No. The court found that the contract was illegal and void. Since the parties were in pari
delicto, Piatek could not recover any compensation. Piatek v. American Income Life
Insurance Co., 2005 U.S. Dist. LEXIS (U.S. Dist. Ct. N.D. Ill. 2005).
4. No. The court stated that a “basic principle of contract law is that agreements to commit a
performance of an illegal act.” State v. Strickland, 400 A.2d 451 (Md. Ct. Spec. App. 1979).
papers from Steamatic’s files was determined to be irrelevant. Steamatic of Kansas City, Inc.
v. Rhea, 763 S.W.2d 190 (Mo. Ct. App. 1988).
6. The plaintiff, a physician, entered into a contract of employment with the defendant medical
practice. The contract included a non-compete. The plaintiff came to believe that the
contract, including the non-compete. The court rejected this argument, characterizing the
registration as unnecessary for public safety. It concluded that to excuse the plaintiff from
Dist. 2004).
7. The court noted that the doctrine of unconscionability generally requires both procedural and
the jury waiver provision and the arbitration provision were presented in take-it–or-leave-it
3d 399 (Cal. Ct. App. 2010).
8. Marcinczyk was required to attend a police academy as a condition of being hired as a police
officer. All recruits at the police academy were required to sign an exculpatory agreement
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
relieving the police academy and others of liability for any injury they might suffer.
Marcinczyk suffered a severe back injury when he fell on a stairway while carrying a heavy
cooler. He sued the academy and others for negligence. The issue was whether the
New Jersey Police Training Commission, 5 A.3d 785 (N.J. 2010).
City’s sole discretion to waive it. Circuit City Stores, Inc. v. Mantor, 335 F.3d 1101 (9th Cir.
2003).
10. Yes. The court examined two issues: (1) the relative bargaining power of the parties, their
relative economic strength, and the alternative sources of supply; and (2) whether the
concluded that there was sufficient evidence to support the trial court’s judgment that the
contract was unconscionable. Gianni Sport Ltd. v. Gantos, Inc., 391 N.W.2d 760 (Mich. Ct.
App. 1986).
AGREEMENTS
Using key word searches such as “non–compete” and “release AND sample,” students should be
able to find a number of examples. Some examples of non-competes can be found at