978-1305575080 Chapter 15 Solution Manual

Unlock access to all the studying documents.

View Full Document

Chapter 15

LEGALITY AND PUBLIC POLICY

RESTATEMENT

When a contract is illegal, it is void and generally not enforceable by the courts. There are certain exceptions to

this principle which are allowed to avoid hardship as in permitting recovery of funds by the party intended to be

protected. Another exception is when a contract is only partially legal. The legal portions can be enforced.

Illegality takes many forms. One issue in illegality is whether a contract is unconscionable. A contract is

unconscionable when it is too harsh or oppressive to one of the parties who was left with no opportunity for

negotiation at the time the contract was agreed to. A contract or clause is determined to be unconscionable on

the basis of the circumstances existing at the time the contract is made. If a contract or portions of a contract is

unconscionable, it will be set aside as void.

Another form of illegal contract is one that affects the public welfare or is contrary to public policy. An agreement

is contrary to public policy when it is so offensive to society that judicial intervention is needed to preserve the

public good.

Gambling contracts are generally illegal, but states have been carving out exceptions for lotteries and games of

chance. Prizes and give-aways are also permitted in some states.

Licensing is an important part of business regulation. A contract for a sale or service that requires a license by an

unlicensed entity or person is void if the license requirement is one of qualification. If the license requirement is

a revenue-raising statute, the courts may declare the contract valid.

Courts scrutinize contracts in restraint of trade carefully. Covenants not to compete, with an ex-employee or as

part of the sale of a business, are enforceable if necessary and reasonable in duration and geographic scope.

Credit contracts have numerous parameters in the law including restrictions on interest rates (usury) and various

credit regulations on price and disclosures.

STUDENT LEARNING OUTCOMES

LO.1: Explain the general contract principles on “illegality”.

LO.2: Explain the implied obligation on all parties of good faith and fair dealing.

LO.3: Understand that it is only in unusual situations that a contract provision will be unenforceable because it

is unconscionable.

LO.4: Explain the rationale for requiring licenses to carry on as a business, trade, or profession.

LO.5: Distinguish between noncompete clauses after the sale of a business and noncompete clauses in

employment contracts.

INSTRUCTOR’S INSIGHTS

Break the chapter down into three components – related Learning Outcomes are indicated in ( ):

1. What are the general contract principles on illegality?

Discuss the effect of illegality on a contract (LO.1)

Explain what happens when a contract is partially illegal

2. What agreements protecting public welfare are void?

Explain the importance of public policy constraints on contracts (LO.3)

3. What is the effect of contracts that violate regulatory statutes?

Discuss the issues surrounding licensing requirements and the contracts with the unlicensed party (LO.4)

Explain when contracts in restraint of trade are void

CHAPTER OUTLINE

I. What are the General Contract Principles on Illegality?

A. Effect of illegality

1. The agreement is void, and no court relief exists

2. Promissory notes given for illegal contracts cannot be enforced

CASE BRIEF: Neiman v. Provident Life & Accident Insurance Co.

217 F.Supp.2d 1281 (S.D. Fla. 2002)

FACTS: Brian Neiman was involved in the illegal practice of law for over seven years. Having

been found guilty of illegally practicing law, he sought to collect disability benefits under his

disability insurance policy with Provident Life due to an alleged bipolar disorder, the onset of

which occurred during the pendency of criminal and bar proceedings against him. Neiman

contends that his bipolar disorder prevents him from working as a paralegal. Provident

contends that Neiman should not be indemnified for the loss of income generated from his

illegal practice of law.

ISSUE: Can Neiman collect on a policy to compensate him for loss of income derived entirely

from an illegal activity?

HOLDING: No. Because all of Neiman’s income was derived from the unlawful practice of law in the seven

years preceding his claim, as a matter of public policy, a court will not enforce a disability

REASONING: Contracts that are contrary to public policy are void because they have no legal sanction and

establish no legal bond between the parties. To determine whether a contract violates public

policy, courts look to established law, primarily to statutes and secondarily to decisions of the

courts. The rationale of the rule is that the judiciary will not provide aid to enforce an obligation

that arises from an illegal conduct.

B. Exceptions to effect of illegality

1. Protection of one party – e.g., illegal shares sold – buyer can get money back

2. Unequal guilt

a. Parties are not in pari delicto

C. Partial illegality

1. Legal parts are enforced if possible

D. Crimes and civil wrongs

1. Agreements to do either are illegal

E. Good faith and fairness

1. The trend is in this direction

F. Unconscionable and oppressive contracts

1. Provision in a contract that gives one party too much advantage over the other party to the contract

2. Determination of unconscionability

a. Procedural unconscionability: focuses on assent; bargaining power; fine print

DISCUSSION POINTS: Thinking Things Through

Legality and Public Policy

Have students discuss the UCC position on unconscionability.

II. What Agreements Protecting Public Welfare are Void?

A. Agreements contrary to public policy

1. A contract may be held not binding on the ground that it is contrary to public policy, even though no

statue or decision declares the contract to be illegal. A contract in itself lawful may be condemned

2. The concept of public policy – contract is offensive to society

DISCUSSION POINTS: Ethics & the Law

Public Policy Issues Regarding Surrogacy Contracts

In the Matter of Baby M, the public policy issues surrounded contracts for the sale-adoption of a baby. The New

Jersey court felt that the public interest in protecting the child required that such contracts be void. The case was

then turned into a custody case and Mr. Stern was awarded custody because Mrs. Whitehead had proven herself

to be unstable. The Rosecky case approves the validity of surrogacy contracts in Wisconsin to the extent that

enforcement is not contrary to the child’s best interests. The Chief Justice raises public policy issues that need to

be addressed.

B. Gambling, wagers, and lotteries

1. Have your students discuss whether the lottery should be illegal on the basis of pure chance only or

whether there can be a combination of chance and skill, and what the appropriate percentages

might be. Address the problem of a golfer who puts a dollar in a pool at the beginning of a round of

2. Have the students discuss whether wagers and lotteries should be illegal. Many activities involve a

degree of speculation and risk that are perfectly legal, such as insurance contracts, the purchasing

3. Skill contests are permitted

4. Some states permit prizes as part of product promotion

III. What is the Effect of Contracts that Violate Regulatory Statutes?

A. Effect of violation of regulatory statute

B. Statutory regulation of contracts

1. Consumer protection statute

C. Licensed callings or dealings

1. Protective license

a. Licensing exists to provide public protection

2. Revenue-raising license

a. Not qualification based

CASE BRIEF: Meteor Motors v. Thompson Halbach & Associates

914 So.2d 479 (Fla. App. 2005)

FACTS: Thompson Halbach & Associates, Inc., an Arizona corporation, entered into an agreement with

Meteor Motors, Inc., the owner of Palm Beach Acura, to find a buyer for the dealership, and it

agreed to pay a 5 percent commission based on the closing price of the sale. Among those

contacted by Thompson Halbach was Craig Zinn Automotive Group, which ultimately purchased

ISSUE: Was the contract for a sales commission invalid due to Thompson Halbach’s status as an

unlicensed out-of-state real estate broker?

REASONING: The Florida statute clearly applies to a foreign broker who provides brokerage activities in

Florida. Thompson solicited potential Florida purchasers for the Florida business and that

purchaser was a Florida corporation.

D. Contracts in restraint of trade – agreement to fix prices or not compete are void

E. Agreements not to compete

1. Sale of business

a. Permissible to protect goodwill

2. Employment contract

a. With regard to covenants not to compete, this is an important area because it may arise in the

future employment of your students.

b. Again, must be necessary and reasonable

CASE BRIEF: Genex Cooperative, Inc. v. Contreras

39 IER Cases 294 (E.D. Wash 2014)

FACTS: On December 12, 2012, defendants Contreras, Senn, Verduzco, and VanderWeerd,

inseminated cows at several dairy farms in Sunnyside, Washington on behalf of their employer,

Genex Cooperative, Inc. (“Genex”). The very next day, they inseminated cows at the same dairy

farms − but this time on behalf of CRV USA (“CRV”), a Genex rival. Jilted by its former

employees and spurned by its customers, Genex filed suit in this court to enforce

non-competition agreements against three of the defendants. Although the individual contracts

varied in terms, Contreras, Senn, and Verduzco contended the agreements were

unenforceable. Mr. VanderWeerd had not signed an agreement.

ISSUE: Did Genex meet its burden to establish the reasonableness of its covenants not to

compete against Verduzco, Senn, and Contreras?

REASONING: The individual contracts varied in terms, but the court found all were unenforceable. Verduzco’s

and Senn’s restrictive covenants were found to be unreasonable in scope because they were

not limited to soliciting or servicing Genex’s customers. Contreras’ restrictive covenant was not

enforceable because it applied to an at-will, low-level employee without unique skills. At one

point the court pointed out: Thus, it appears Genex actually used restrictive covenants as either

a method to eliminate legitimate competition or to strong-arm its employees to accept

ever-dwindling wages and restrict their freedom to work. Genex has failed to demonstrate that

the equities are in its favor and has failed to show how any reformation of the covenant would

be reasonable.

3. Effect of invalidity

F. Usurious agreements

1. Contracts with interest rate in excess of maximum

2. Penalties vary from void to loss of interest

DISCUSSION POINTS: Thinking Things Through

Noncompete Clauses, Cause for Concern?

Discuss the balancing courts do in handling non-compete clauses and their effects on innovation, right to earn a

living, and protection of property rights.

CASE BRIEF: Pinchuck v. Canzoneri

920 So.2d 713 (Fla. App. 2006)

FACTS: Karen Canzoneri entered into two agreements with Howard Pinchuck. Under the first

agreement, Canzoneri advanced $50,000 to be repaid at 12 percent per month for 12

consecutive months “as an investment profit.” The second agreement required “$36,000 to

be repaid on or before 6/1/01 with an investment profit of $36,000, total being $72,000.”

The annualized rate of return for the first transaction was 144 percent and for the second

transaction was 608 percent. The civil penalty for violating the state’s maximum interest

rate of 25 percent per annum is forfeiture of the entire principal amount. Canzoneri

contends that the transactions were investments not subject to the usury law.

ISSUE: Was the transaction usurious, even though the language of the contract called the

repayments an “investment profit”?

REASONING: The four elements of a usurious transaction are present: (1) the transaction was a loan, (2)

the money lent required that it be returned, (3) an interest rate higher than allowed by law

was required, and (4) a corrupt intention to take more than the legal rate for the use of the

money loaned exists. Even though the terms called for “profit,” not “interest,” the courts

looked to the substance, not the form of the transaction.

ANSWERS TO QUESTIONS AND CASE PROBLEMS

1. Unconscionability. Parties are in pari delicto when both are equally guilty of a violation of a law.

2. Unconscionability. No, the U.S. West contract was a contract of adhesion. There was lack of mutuality. The

3. Licensed callings or dealing § 11. Judgment for Deafeamkpor setting aside the $90,000 verdict. The licensing

requirement of this city, even when work is satisfactory, is strictly enforced to protect consumers from

4. Noncompete agreements. Even if the covenant not to compete is not void…it is a contract in restraint of

trade that must meet three requirements under Oregon common law to be enforceable: (1) it must be

restricted in its operation in respect either to time or place; (2) it must be on some good consideration; and

5. What constitutes a solicitation prohibited by a restrictive covenant. This letter was a solicitation. Although it did

not expressly seek customers, a person receiving such letter would regard it as a statement that Ewing was

available, licensed, and qualified to do pest control work. The supplying of the address and phone number

that the customers did not previously have was clearly an indication that Ewing was willing to be contacted at

that address and number. Because he was no longer employed by Presto -X, there would be no reason for

customers to use the address or phone number Ewing provided if they were trying to reach Presto -X, only if

they were trying to reach Ewing. Therefore, the letter was a solicitation of pest control work. The ethical

6. Agreement contrary to public policy. Judgment for Crossroads. The Minnesota Adoption Statute made it clear

that the public policy of the state was to place the child with an applicant only if that would be in the best

7. Illegality; public policy; unjust enrichment. The agreement for the sale of fireworks violated state fireworks

law. The equitable principle of unjust enrichment did not permit fireworks supplier’s recovery of fair value of

dangerous fireworks delivered and accepted pursuant to an agreement in violation of state fireworks law

8. Agreements not-to-compete. The provision prohibits Shaffer from working for any other business in the pest

control industry in any capacity. It bars him from engaging even indirectly, or concerning himself in any

manner whatsoever, in the pest control business, even as a passive stockholder of a publicly traded

9. Anticompetitive covenant in employment contracts; effect of excessive restriction. No. Assuming that Smith’s

employment by Lady Baltimore constituted a breach of the anticompetitive covenant with Borden, an

Authors’ Comment: The court refused to follow Iowa and New Jersey, in which the courts had applied the

“blue pencil rule.” Under that rule, a court holding a restrictive covenant inoperable because it is too broad

10. Arbitration requirements; unconscionable clauses. Judgment for Adams. The arbitration provision is

unenforceable. The DRA is procedurally unconscionable because it is a contract of adhesion drafted by the

The DRA is substantively unconscionable because employees must arbitrate “any and all

employment-related claims” while Circuit City was not obligated to arbitrate its claims against employees and

may bring lawsuits against employees, thus depriving the DRA of any modicum of bilaterality. Moreover, the

11. Validity of anticompetitive contract. No. American had a legitimate interest in protecting its goodwill by

preventing Vodra from soliciting its customers. The three -year restraint imposed by the contract was not

12. Knowledge of illegal purpose of other contracting party. No. The plaintiff has not in any way participated in the

commission of a crime. The mere act of leasing the goods did not constitute a crime, and the transaction was

not made illegal because of the lessor’s knowledge of the lessee’s intent to use the property in an unlawful

13. Narrow construction of restrictive covenants. The restrictive covenant only prohibited the New York publisher

from selling the book in England. The customers of the New York publisher were therefore not bound by the

sales contract. The New York publisher sold to its customers without requiring them to agree to comply with

This can be used to illustrate the importance of looking ahead to see whether the contract a party makes will

really cover the future situations that are likely to arise.

14. Unconscionable clauses. The court found the arbitration provision to be procedural and substantively

unconscionable and refused to sever the objectionable clause, because GeoEx sought to create an inferior

15. Good faith and fair dealing. While every contract has an implied obligation of good faith and fair dealing that

neither party shall do anything to destroy the rights of the other party under the contract, the season ticket

holder has no contractual right to renew. As stated on the back of the ticket and in other promotional

LAWFLIX

Midnight Run (1988) (R)

Have the students determine whether the contract Robert DeNiro has for bringing in Charles Grodin, an

embezzler, is legal. Then have them discuss the issues of consideration and ethics as the bail bondsman puts

The Insider (1999) (R)

The movie is the story of former tobacco executive, Jeffrey Wigand, and the issue of his non-disclosure contract

management system for classroom use.