Chapter 13
ILLEGAL BARGAINS
A. Violations of Statutes
1. Licensing Statutes
2. Gambling Statutes
3. Usury Statutes
4. Sunday Statutes
B. Violations of Public Policy
1. Common Law Restraint of Trade
a. Sale of a Business
b. Employment Contracts
2. Exculpatory Clauses
3. Unconscionable Contracts
4. Torous Conduct
5. Corrupng Public Ocials
C. E ect of Illegality
1. General Rule: Unenforceability
2. Excepons
a. Party Withdrawing Before
Performance
b. Party Protected by Statute
c. Party Not Equally at Fault
d. Excusable Ignorance
e. Paral Illegality
Cases in This Chapter
Alcoa Concrete & Masonry v. Stalker Bros.
Payroll Advance, Inc. v. Yates
Anderson v. McOskar Enterprises, Inc.
Sanchez v. Western Pizza Enterprises, Inc..
Chapter Outcomes
After reading and studying this chapter, the student should be able to:
Identify and explain the types of contracts that may violate a statute and distinguish between the two
types of licensing statutes.
Describe when a covenant not to compete will be enforced and identify the two situations in which
these types of covenants most frequently arise.
Explain when exculpatory agreements, agreements involving the commitment of a tort, and agreements
involving public officials will be held to be illegal.
Distinguish between procedural and substantive unconscionability.
Explain the usual effects of illegality and the major exceptions to this rule.
TEACHING NOTES
An essential requirement for an agreement to be enforceable is that its objective
be legal. An unenforceable agreement is one that a court will not compel the
parties to perform. When such an agreement is presented to a court for
enforcement, the court will generally leave the parties where it finds them.
A. VIOLATIONS OF STATUTES
An agreement declared illegal by statute will not be enforced by the courts.
Example: wagering or gambling agreements are specifically declared
unenforceable in most states.
*** Chapter Outcome ***
Identify and explain the types of contracts that may violate a statute and
distinguish between the two types of licensing statutes.
Licensing Statutes
Require a license for those in certain trades, professions, or businesses, such as
lawyers, doctors, teachers, accountants, brokers, plumbers, and contractors. In
some cases, a person who has failed to comply with a licensing requirement may
not recover for services rendered; usually depends on whether the license is
regulatory or for revenue.
A regulatory license is a measure designed to protect the public against
unqualified persons (such as in law or medicine); a person usually cannot
CASE 13-1
ALCOA CONCRETE & MASONRY v. STALKER BROS.
Rodowsky, J.
*** At issue is whether a home improvement general contractor is contractually obligated to pay
a subcontractor who was not licensed under ***, either at the time of entering into the
subcontract or when the subcontract was properly performed, but who was licensed when this
suit was brought.
The president of Alcoa affirmed that Alcoa and Stalker had done business from 2004
through 2007. In 2004, all of Alcoa’s invoices were fully and timely paid. When payments in
2005 became less regular, Stalker promised to pay Alcoa when a building owned by the Brothers
was sold, but full payment was not made. Alcoa continued to perform subcontract work for
Stalker based on an agreement that the General Contractor would pay Alcoa $1,500 per week
against invoices for past work and new work. In November 2006, Alcoa performed the cement
and masonry work for Stalker on the “Cahill” job, in which Stalker represented there was
sufficient profit to pay Alcoa for that subcontract and for the entire past due balance, but an
Appellees moved for summary judgment on a number of grounds, but the circuit court
granted the motion solely on the ground that the series of subcontracts were illegal and could not
be enforced. The circuit court accepted appellees’ argument that was based upon a venerable line
of Maryland cases dealing with licensing and that is illustrated in the home improvement field
principally by Harry Berenter, Inc. v. Berman, [citation]. In essence, these cases initially inquire
whether the purpose of a business licensing statute is to raise revenue or to protect the public. If
***
Maryland appellate decisions have applied the revenue/regulation rule in a number of
contexts. All of the cases under the Act have dealt with the contractor-owner relationship. The
members of the public who were protected by the regulatory licensing requirement were the
owners of the home. This Court recently again has held, applying Harry Berenter, that a contract
between the owner of the improved premises and an unlicensed contractor would not be
enforced. [Citation.] * * *
* * *
Our review fails to disclose any Maryland appellate decision directly answering whether the
regulatory license rule applied in Harry Berenter, declaring unenforceable a home improvement
The authors of Corbin on Contracts, after reviewing the revenue/regulatory rule, state:
Even when the purpose of a licensing statute is regulatory, courts do not always deny
enforcement to the unlicensed party. The statute clearly may protect against fraud and
incompetence. Yet, in very many cases the situation involves neither fraud nor incompetence.
The unlicensed party may have rendered excellent service or delivered goods of the highest
quality. The noncompliance with the statute may be nearly harmless. The real defrauder may
be the defendant who will be enriched at the unlicensed party’s expense by a court’s refusal to
enforce the contract. Although courts have yearned for a mechanically applicable rule, most
* * *
After the decision in Harry Berenter, in which the Court relied in part on the Restatement of
Contracts, the American Law Institute adopted Restatement (Second) of Contracts (1981).
Section 178 states a more flexible approach to enforceability than the rigid revenue/regulatory
dichotomy. Section 178 reads:
When a Term Is Unenforceable on Grounds of Public Policy
(1) A promise or other term of an agreement is unenforceable on grounds of public
policy if legislation provides that it is unenforceable or the interest in its enforcement
is clearly outweighed in the circumstances by a public policy against the enforcement
of such terms.
(2) In weighing the interest in the enforcement of a term, account is taken of
(a) the parties’ justified expectations,
(b) any forfeiture that would result if enforcement were denied, and
(c) any special public interest in the enforcement of the particular term.
(3) In weighing a public policy against enforcement of a term, account is taken of
***
Accordingly, we shall reverse the judgment of the Circuit Court for Montgomery County and
remand this action for further proceedings, not inconsistent with this opinion.
Gambling Statutes
Contracts found to be in violation of a gambling statute are void. Insurance
contracts do not fall under gambling statutes except where the person taking the
policy does not have an insurable interest in the property or individual being
insured. So-called futures contracts are not considered gambling despite the
element of chance involved in establishing the future price.
Usury Statutes
Laws establishing a maximum rate of permissible interest for which a lender and
borrower of money may contract. A lender violating a usury statute may forfeit
both principal and interest, only the interest, or only the interest in excess of the
Sunday Statutes
Common law does not prohibit entering into contracts on Sunday. Some states
have legislation, Blue Laws, modifying this common law rule and prohibiting
certain types of commercial activity on Sunday. Blue laws usually do not apply
to activities of “necessity” and “charity.”
B. VIOLATIONS OF PUBLIC POLICY
This is a judicially created approach aimed at voiding contracts considered by
the courts not to be in the public interest. Courts take a broad view when
considering public policy arguments directed at private contract relationships.
*** Chapter Outcome ***
Describe when a covenant not to compete will be enforced and
identify the two situations in which these types of covenants most frequently arise.
Common Law Restraint of Trade
Since the public benefits from vigorous commercial competition, contracts that
unreasonably restrain trade are illegal. However, where the restraint is a
secondary provision in the contract and protects the promisee’s property interest
and is reasonable, it will be allowed.
Sale of a Business — Buyers of a business often incorporate into the sales
CASE 13-2
PAYROLL ADVANCE, INC. v. YATES
Missouri Court of Appeals, 2008
270 S.W.3d 428
http://scholar.google.com/scholar_case?case=12029870438647495616&q=270+S.W.3d+428&hl=en&as_sclt=2,22
Barney, J.
Payroll Advance, Inc. (“Appellant”) appeals from the judgment of the trial court entered in favor
of Barbara Yates (“Respondent”) on Appellant’s petition for injunctive relief and breach of
contract of an “Employment Agreement” (“the Employment Agreement”) which contains a
covenant not to compete. * * *
* * *
[T]he record reveals that Appellant, a foreign corporation, is licensed to transact business in
the State of Missouri and has numerous locations throughout the state, including a branch located
in Kennett, Missouri. [Footnote: Appellant is “a payday loan company. [It] gives loans to clients
out in the community.” As best we discern the record, loans are made for short periods of time at
high rates of interest. Appellant’s manager testified that a payday loan company such as
Appellant’s is not like a bank because banks “normally [do not do] short-term loans.” She also
distinguished Appellant’s entity from a title loan company or a debt consolidation concern.] It is
customary for each of Appellant’s branch offices to employ a sole employee at each branch and
that sole employee is typically referred to as the manager of that particular branch. In June of
1998, Respondent was hired as the manager of the branch office in Kennett. On November 19,
Approximately thirty-two days after being terminated by Appellant, Respondent became
employed with Check Please, one of the approximately fourteen other payday loan
establishments in the area. At Check Please, Respondent performed basically the same duties
such as office management and customer care as she had when employed with Appellant.
On February 7, 2008, Appellant filed its “First Amended Petition for Injunctive Relief and
Breach of Contract.” In this petition, Appellant brought Count I for injunctive relief to prevent
Respondent from soliciting its clients for her new employer, and to stop her from using client
information she purportedly obtained from her time with Appellant. Count II of the petition was
for damages for breach of contract for violation of the covenant not to compete together with
attorney fees and costs.
* * *
On February 14, 2008, the trial court entered its judgment which found “[n]o evidence exists
that, following [Appellant’s] termination of [Respondent’s] ten year period of employment,
[Respondent] removed any customer list or other documents from [Appellant’s] place of business
[or] … made any personal or other contact with any previous or present customer of
Accordingly, in its discretion, the trial court found “the above result would be unreasonable
under the facts and circumstances of the particular industry, agreement, and geographic location
here involved.” The trial court then ruled in favor of Respondent and against Appellant. The trial
court also denied Respondent’s request for attorney’s fees and costs. This appeal followed.
* * *
“Generally, because covenants not to compete are considered to be restraints on trade, they
are presumptively void and are enforceable only to the extent that they are demonstratively
reasonable.” [Citations.] “Noncompetition agreements are not favored in the law, and the party
attempting to enforce a noncompetition agreement has the burden of demonstrating both the
necessity to protect the claimant’s legitimate interests and that the agreement is reasonable as to
time and space.” [Citation.]
There are at least four valid and conflicting concerns at issue in the law of non-compete
agreements. First, the employer needs to be able to engage a highly trained workforce to be
competitive and profitable, without fear that the employee will use the employer’s business
next. Third, the law favors the freedom of parties to value their respective interests in
negotiated contracts. And, fourth, contracts in restraint of trade are unlawful.
[Citation.] “Missouri courts balance these concerns by enforcing non-compete agreements in
certain limited circumstances.” [Citation.] “Non-compete agreements are typically enforceable
so long as they are reasonable. In practical terms, a non-compete agreement is reasonable if it is
no more restrictive than is necessary to protect the legitimate interests of the employer.”
[Citation.] Furthermore, “[n]on-compete agreements are enforceable to the extent they can be
narrowly tailored geographically and temporally.” [Citation.] Lastly, it is not “necessary for the
employer to show that actual damage has occurred, in order to obtain an injunction. The actual
damage might be very hard to determine, and this is one reason for granting equitable relief.”
[Citation.]
* * *
Here, the covenant not to compete grandly declares that Respondent cannot “compete with
Appellant [Payroll] as owner, manager, partner, stockholder, or employee in any business that is
in competition with [Appellant] and within a 50 mile radius of [Appellant’s] business….”
(Emphasis added.) There was evidence from Appellant’s representative at trial that Appellant has
seventeen branch offices in Missouri and still other locations in Arkansas. If this Court interprets
the plain meaning of the covenant not compete as written, the covenant not to compete would
prevent Respondent not only from working at a competing business within 50 miles of the
branch office in Kennett, Missouri, but Respondent would also be barred from working in a
competing business within 50 miles of any of Appellant’s branch offices. Under this
interpretation, Respondent would be greatly limited in the geographic area she could work.
Additionally, the covenant not to compete bars Respondent from working at “any business
Appellant’s second point relied on asserts the trial court erred in denying its petition because
[t]he trial court erroneously applied the law in failing to modify the covenant not to compete to a
geographic scope it found to be reasonable in that the court found the geographic scope to be
unreasonable for the payday loan industry but failed to modify the covenant not to compete to
reflect a geographic scope that would be reasonable and enforceable.
Exculpatory Clauses
Contractual provisions excusing a party from liability for his own tortious conduct
are generally disfavored by the courts because they violate public policy. If it is
clearly written, an exculpatory clause may excuse one party’s negligent conduct,
though this is usually carefully scrutinized by the court.