445
Unit Three
Focus on Ethics:
Contract Law and
the Application of Ethics
See Separate Lecture Outline System
INTRODUCTION
This Focus on Ethics highlights some ethical issues that have emerged in the application of contract law. Many areas of
contract law lend themselves to ethical analysis. For instance, a court generally will not inquire into the adequacy of
consideration. A businessperson could knowingly arrange an exchange in which consideration was far less than value received
and successfully argue in court that the consideration was adequate to make the contract legally enforceable. Nonetheless, that
person may still be violating the ethics of society.
446 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ADDITIONAL RESOURCES—
VIDEO SUPPLEMENTS
The following video supplements relate to ethical issues on topics discussed in this feature—
Business Law Digital Video Library
The Business Law Digital Video Library at www.cengage.com/blaw/dvl offers a variety of videos for group or
individual review. Clips related to topics in this feature include the following.
• Ask the Instructor
carriers, or contracting parties who have a public or statutory duty. In upholding an exculpatory clause, the court will
focus on whether the clause is knowingly and voluntarily entered into by both parties.
to sign a non-compete agreement. The scene explores issues in contract negotiation as well as intellectual property
FOCUS OUTLINE
I. Freedom of Contract and Freedom from Contract
If, in contracting, an individual fails to look after his or her own interest, should the party with whom he or she
contracts do so? For instance, if a seller unknowingly offers goods at less than half their market price, does a buyer
have an ethical responsibility to tell the seller (i.e., not to harm the seller by taking advantage of the circumstance)?
Not saying anything about the true value of the goods could be justified by the principle of freedom of contract.
A. IMPOSSIBILITY OF PERFORMANCE
One hundred years ago, holding a party in breach when performance was impossible through no fault of the party
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B. UNCONSCIONABILITY
C. EXCULPATORY CLAUSES
Sometimes, the law permits parties to assume by express agreement the risks inherent in certain activities. An
exculpatory clause may be held unconscionable or contrary to public policy and thus void, however, when there is
disparity in bargaining power. For this reason, such clauses in contracts between employers and employees are
almost universally rejected (“freedom from contract”).
II. Covenants Not to Compete
The text indicates that the constantly changing state of technology has led to knowledge learned on the job, including
trade secrets, becoming a more valuable commodity than it once was. This has led to a wider use of covenants not to
compete and more challenges to their legality.
A. JURISDICTIONAL DIFFERENCES IN ENFORCEMENT
In some states, they are not enforceable. In states in which they are enforceable, a covenant cannot be overly
broad, in which case a court might reform it.
B. DO NONCOMPETE CLAUSES STIFLE INNOVATION?
There is a strong public policy favoring competition. According to one observer, the benefit of this policy was
underscored in the 1990s when technological development and economic growth soared in California—where
covenants not to compete are prohibited—but languished in Massachusetts—where the covenants are allowed.
B. CRITICISMS OF THE STATUTE OF FRAUDS
The Statute of Frauds has been criticized because it can be used as a technical defense. This is one of the reasons
that there are exceptions such as the doctrine of promissory estoppel.
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TEACHING SUGGESTIONS
1. Explain how much American society in general and business in particular has changed over the last two hundred
years. The United States has gone through political, industrial, and technological revolutions. Business has grown from
small master-servant workshops to huge multinational conglomerates. As introduced in Unit One’s Focus on Ethics, as
enty years, the change has accelerated. As will be discussed in Unit Three, in recent years there have been many
attempts to make commercial law more reflective of modern commercial practices and more conducive to uniform
2. Discuss ethics in the context of mistakes in contract law. The notion that a mistake should release contracting
parties from their obligations gained strength as ethics changed. At one time, rescission based on a unilateral mistake
diligence. Today, rescission on account of computation errors is permissible when the only injury to the other party is
loss of the expectancy engendered by a favorably low bid.
3. The doctrines of quasi contract and unjust enrichment are based on the theory that individuals should not profit or
enrich themselves inequitably at the expense of others. This fundamental belief is inspired by ethical considerations.
When quasi-contractual remedies are granted, are the freedoms of contract and from contract are sacrificed (that is, to
attain greater justice and fairness)?
4. Silent fraud, or misrepresentation by silence, involves questions of fairness because it is not always clear what
whether the law should aid people who suffer injury on learning about such events after they have purchased
property. Should an employer tell prospective employees of its precarious financial condition? Does the employer
have a duty to do so?
Cyberlaw Link
How do ethical standards affect the freedoms of contract and from contract in the context of cyberspace? Should
the law change to reflect the application of these standards in this context?
ADDITIONAL QUESTIONS
1. What are common ethical assumptions between which a balance has to be struck to prevent injustice in the area of
contracts? One is that individuals should be held responsible for the consequences of their actions. This is expressed in the
principle of freedom of contract. Another assumption is that individuals should not harm each another by their acts. The
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conflict between these assumptions is illustrated by a situation in which, in contracting, an individual fails to look after his or her
own interest—should the party with whom he or she contracts do so? Not looking after another’s interest could be justified by
2. On what assumption does the doctrine of impossibility of performance rest? The doctrine of impossibility of
3. How does the doctrine of unconscionability represent an attempt to enforce ethical behavior? Under the UCC and in
4. What is the tradeoff represented by the Statute of Frauds? The Statute of Frauds (which requires written evidence of
5. What ethical standards are at issue in the application of the doctrine of promissory estoppel? The ethical standard at
issue in the application of the doctrine of promissory estoppel is that it does not seem fair that one party, in reliance on another
party’s promise, should be required to perform a contractual obligation when the other party does not perform. Under the
doctrine of promissory estoppel, a person who has reasonably relied on the promise of another can obtain some recovery. In
the business world, a person who relies to his or her detriment on the promise of another can often recover damages,
particularly when justice is served by estopping the other party from denying that a contractual promise was made.
ACTIVITY AND RESEARCH ASSIGNMENT
Have students investigate the alternatives to contracts and their social and ethical implications. After the Russian
Revolution, the communist government attempted to replace contracts with administrative norms. In early English history, in
medieval times, society was class-based—there was no need for contract law because the peasant class owed allegiance to the
450 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
The costs and benefits of repeal might run principally to the costs and benefits of contracting and litigating
CONTRACT LAW AND THE APPLICATION OF ETHICS—
ANSWERS TO DISCUSSION QUESTIONS
1. Suppose that you contract to purchase steel at a fixed price per ton. Before the contract is performed, a lengthy
steelworkers’ strike causes the price of steel to triple from the price specified in the contract. If you demand that the
supplier fulfill the contract, the supplier will go out of business. What are your ethical obligations in this situation?
What are your legal rights? The doctrine of impossibility of performance is based in part on the ethical question of
2. Many countries have no Statute of Frauds, and even England, the country that created the original act, has
repealed it. Should the United States do likewise? What are some of the costs and benefits to society of the Statute of
Frauds? The Statute of Frauds requires that certain contracts be in writing to be enforceable. The primary purpose of
3. In determining whether an exculpatory clause should be enforced, why does it matter whether the contract
containing the clause involves essential services (such as transportation) or nonessential services (such as skiing or
other leisure-time activities)? A common ethical assumption in our society is that individuals should be responsible for
to excuse a party from liability in the event of monetary or physical injury, no matter who is at fault. In some
4. Employers often include covenants not to compete in employment contracts to protect their trade secrets. What
effect, if any, will the growth in e-commerce have on the reasonability of covenants not to compete? Knowledge
The growth in e-commerce could affect the terms that an employer might want—or might legally be permitted—
to include in a covenant not to compete by expanding their scope. The Internet might affect the enforceability of a