Environmental Engineering Chapter 10 One Section Will Represent The Injured Plaintiffs

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Chapter 10

LEGALITY, CONSENT, AND

WRITING

Suggested Additional Assignments

Research: Exculpatory Clauses

Students should find an exculpatory clause, perhaps on a parking lot claim check, check-room receipt, or

sports admission ticket, and report in class precisely what conduct or events the clause covers, and

whether, in their view, it is legal.

Drafting Exercise: Noncompete Clause

Students should assume that they are partners in a bakery in St. Louis, Missouri, that specializes in exotic,

Drafting Exercise: Distinguishing Puffery and Misrepresentation

Students should write one page of dialogue or prose describing a sales pitch made to a consumer. The

seller should tread the fine line between puffery and misrepresentation, and the student should be able to

declare whether the conduct was lawful, and why.

Research: Fine Art

This exercise focuses on the issues of misrepresentation, silence, and mistake. Ask students to research a

Chapter Overview

Chapter Theme

No matter how profitable a particular contract clause may appear to be, it is worthless if it is illegal. For

Quote of the Day

“Gambling is the child of avarice, the brother of iniquity, and the father of mischief.” –George

Washington (1732-1799), United States president.

2 Unit 2 Contracts and the UCC

The Sadri Case1: Legal Background

This chapter’s opening vignette about the suit in California over Soheil Sadri’s Nevada casino gambling

debts can generate many questions, some not directly related to the legality issue, that nevertheless

deserve answers so students can put the case in its proper context.

Question: Why did the casino sue in California?

collection agency.

Question: Why was the credit collection agency the plaintiff?

Question: What does that mean?

Answer: It means the collection agency paid Caesar’s Tahoe something less than $22,000 and stepped

Question: Why was the lawsuit in California?

Question: Could it have sued Sadri in Nevada?

Answer: Yes, if the Nevada court decided that it could exercise long-arm personal jurisdiction over

Question: Would the outcome have been different if Sadri was sued in Nevada?

enforce Nevada’s judgment even if it conflicted with California public policy.

Question: Then why the different result in this case?

Answer: Because the collection agency was not seeking to enforce a Nevada court judgment, but a

Question: Why are illegal contracts unenforceable?

Answer: It would be socially destructive if the courts, which are intended to uphold the law, began to

Question: Isn’t it unfair to allow someone to gamble on credit and then refuse to pay the debt by hiding

behind this legal doctrine? Why should a casino suffer the loss?

Answer: Many of us might disagree with Sadri’s ethics. There is an important lesson in this case,

Comment: Students might be surprised to learn that the statute making contracts for gambling debts

enforceable in Nevada only came into effect in 1983.

Legality

Noncompete Agreements

Noncompete agreements violate public policy against restraints of trade. It is often useful in the midst of

a discussion of noncompete cases, when students may lose sight of the reason for analyzing a clause’s

Chapter 10 Legality, Consent, and Writing 3

reasonableness, to ask why a noncompete clause raises the issue of legality. Returning to the big picture

can put the discussion of the reasonableness of a clause in a new light.

Ancillary to the Sale of a Business

Students may want mechanical rules-of-thumb to determine whether a noncompete clause ancillary to the

sale of a business is reasonable: Is a distance of ten miles too close? Too far? Just right? Whether a

Case: King v Head Start Family Hair Salons, Inc.2

Facts: For the most recent 16 years, Kathy King had worked at Head Start, which provided hair cuts,

coloring and styling for men and women. King was primarily a stylist, though she had also managed one

Issue: Was the noncompetition agreement valid?

Holding: Reversed and remanded. Excerpts from the court’s opinion:

King has been in the hair-care industry for 25 years, and that it is the only industry in which she is skilled

and the only industry in which she can find employment. Head Start has 30 locations throughout the

Jefferson County and Shelby County area, making it virtually impossible for her to find employment in

Head Start is nevertheless entitled to some of the protection it sought in the noncompetition

agreement. King may be able to attract many of her former Head Start customers if she is allowed to

provide hair-care services unencumbered by any limitations. To prevent an undue burden on King and to

Question: How does the court analyze the reasonableness of this noncompetition agreement?

Question: Why does it rule that the noncompetition is invalid?

Answer: It would bar King from working within a two-mile radius of any Head Start facility. Head

Question: Since it ruled the clause to be invalid, is King free to take a job anywhere?

2 886 So.2d 769 Supreme Court of Alabama, 2004

4 Unit 2 Contracts and the UCC

Question: What effect would that have on King?

Answer: Ironically, it would result in King losing the job to which she moved from Head Start,

Question: Courts tend to be antagonistic to noncompetition agreements. Why is that?

Question: Suppose an employer could request any restrictions it wanted on future employment.

What problems could that create?

Answer: An employer might demand that the employee not work anywhere in the particular field

Question: But if an employee agrees to certain conditions, why shouldn’t they be enforced? If a

worker knowingly agrees he will never work for another employer, anywhere, in the same field, why

not require him to live up to his word?

Answer: Contemporary courts will not do so, because they consider such agreements harmful to the

Question: If a court is free to ignore a contract provision, such as a noncompete agreement, doesn’t

that render the contract worthless?

Answer: It does not make a contract worthless, but it does diminish the ability of the parties to

Drafting Exercise: Noncompete Clause

If students completed the exercise to draft a noncompete clause they could review their treatment of these

issues:

• Trade Secrets. The bakery is entitled to protect trade secrets. The contract may prohibit Sandra from

making any use of recipes or formulas, she may not take them to a competitor or use them herself.

Chapter 10 Legality, Consent, and Writing 5

Exculpatory Clauses

• An exculpatory clause is generally unenforceable when it attempts to exclude an intentional tort

or gross negligence.

You Be The Judge: Ransburg v Richards3

Facts: Barbara Richards leased an apartment at Twin Lakes, a complex owned by Lenna Ransburg. The

written lease declared that:

• Twin Lakes would “gratuitously” maintain the common areas.

Issue: Was the exculpatory clause valid?

Argument for Tenant: An exculpatory clause in a contract for an essential service violates public

policy. When an ill person seeks medical care, his doctor cannot require him to sign an exculpatory

clause. In the same way, a person has to live somewhere. Her landlord cannot force her to sign a waiver.

Landlords tend to be wealthy and powerful. There is generally no equality of bargaining power

she was free to take her business to another landlord.

Landlords may generally be wealthier than their tenants, but that fact alone does not mean that a

landlord is so powerful that leases are offered on a “take it or leave it” basis. Here, the landlord stated the

exculpatory clause plainly. This is a clear contract between adults, and it should stand in its entirety.

Holding: Judgment affirmed. Excerpts from the court’s opinion:

Resolving the question of whether this lease provision is void as against public policy turns on fairly

3 770 N.E.2d 393 Indiana Court of Appeals, 2002

6 Unit 2 Contracts and the UCC

deserved would be the forfeiture suffered by the party attempting to enforce the bargain; and (v) the

Dissent: The majority ignores the plain meaning of the exculpatory clause and violates the well-settled

common law right of the parties to make such a provision and to have it enforced according to its terms.

Question: What is an exculpatory clause?

Question: Why did the court hold this exculpatory clause to be unenforceable?

latter’s choices may be limited, and thus tenants have little leverage to bargain for better terms.

Question: Is that always true?

Question: Many of the examples in the text show exculpatory clauses to be unenforceable. Is that

the general rule?

contracts.

Question: Why is that distinction important?

Answer: Courts may, as in this case, be more willing to take an active role in determining the

contracts or those in which the parties were represented by counsel.

Question: Why?

Answer: Courts should rarely second-guess the fairness of decisions made by businesspeople in the

Question: Can you explain further?

Answer: The text makes this point on p. 310, Economics & the Law. A valid exculpatory clause

Role Play: Exculpatory Clauses

An exculpatory clause is one that attempts to release one party from liability in the event of injury to the

other party. These clauses have an obvious attraction to many companies, but they carry one major risk: a

court may ignore them. Courts frequently reject exculpatory clauses that they consider overbroad. In this

Chapter 10 Legality, Consent, and Writing 7

arguments and ask questions. The case is Hertz Corp v. Garrott.4The standard Hertz lease, used in

Illinois, included a provision stating that the rented vehicle would be driven only by the customer and

certain authorized persons who had the customer’s permission. One such authorized person was an

immediate family member who was a licensed driver over the age of 25.

Angelique Garrott rented a Hertz car. The next day Angelique’s husband, Rodney, was driving the

vehicle when it struck a Chicago taxicab, injuring the cab’s passengers and damaging both cars.

Regrettably, Rodney was under age 25, intoxicated, and driving without a license, which had been

suspended several months earlier. All of the injured parties sued Hertz.

this accident.

Possible Answer: This argument is simple and straightforward. The lease agreement explicitly stated

that the car could be driven only by an authorized driver, meaning a sober, licensed driver over age 25.

Rodney was unlicensed, drunk, and underage. Consequently this was unauthorized use. As the back of

the form stated, unauthorized use voided the insurance coverage. That was the agreement Angelique

Garrott made, and that is the contract the court should enforce.

Question for Injured Parties‘ Lawyers: Make an argument for the taxi company and its passengers that

Hertz’s insurance coverage did apply.

Answer. The policy should be void as against public policy. The primary purpose of this liability

Suggested Additional Questions:

For Hertz: If Hertz can avoid paying damages because of this violation of the law (driving without a

license and drunk driving), couldn’t Hertz rewrite the contract so that its insurance is voided by any

improper driving, such as speeding, an illegal turn, and so forth? Couldn’t Hertz in fact make the policy

useless if it chose to?

For Injured Parties: The Garrotts knew perfectly well that Rodney should not be driving. Even without

reading the contract, they could have guessed that a drunk, unlicensed driver did not have permission to

use the car. Further, both driving without a license and drunk driving are serious violations of the law.

Why should a court help people who violate the contract and break the law?

For Judges: Who should win and why?

Answer: The trial court ruled in favor of Hertz on the insurance issue, declaring the exculpatory clause

4 238 Ill. App. 3d 231, 606 KEW 219, 1992 Ill. App. LEXIS 1751 Michigan Court of Appeals, 1992

8 Unit 2 Contracts and the UCC

Unconscionable Contracts

An unconscionable contract is one that a court refuses to enforce because of fundamental unfairness. Even

if a contract does not violate any specific statute or public policy, it may still be void if it “shocks the

conscience” of the court.

Additional Case: Worldwide Insurance v. Klopp5

Facts: Ruth Klopp was permanently injured in a serious auto accident. The other driver was uninsured,

so Klopp filed a claim with her insurer, Worldwide, under her “uninsured motorist” coverage. Her policy

agreed and entered judgment for the full $90,000. Worldwide appealed.

Issue: Is the provision requiring arbitration and then permitting appeal by either party void as

unconscionable?

Holding: Judgment for Klopp affirmed. Public policy favors arbitration. But here, although the contract

provision theoretically allows either party to appeal any arbitration award over the statutory minimum,

common sense dictates that only the insurance company will appeal a large award. The clause is

unconscionable because it enables one side only–the insurance company–to escape arbitration.

Question: What is an “unconscionable” contract?

Question: What are the two factors that courts most often look at in deciding whether a contract is

unconscionable?

Answer: The two factors that most often lead to a finding of unconscionability are oppression,

Question: Evaluate the Klopp case in terms of those two criteria.

Answer: As to oppression, the insurance company drafted the contract and presented it to Klopp as a

The UCC: Unconscionability and Sales Law

With the creation of the Uniform Commercial Code (UCC), the law of unconscionability got a boost. The

Code explicitly adopts unconscionability as a reason to reject a contract. Although the Code directly

applies only to the sale of goods, its unconscionability section has proven to be influential in other cases

5 603 A.2d 788, 1992 Del. LEXIS 13 Supreme Court of Delaware, 1992

Chapter 10 Legality, Consent, and Writing 9

Voidable Contracts: Capacity and Consent

Capacity is the legal ability to enter into a contract.

Minors

The rule that a minor may avoid a contract will come as news to many students and may generate a great

deal of discussion on ways in which this rule could be abused. The authors provide the best response to

Additional Case: Star Chevrolet Co. v. Green6

Facts: Kevin Green paid $4,600 cash for a used Camaro from Star Chevrolet. When the car blew a

gasket, the dealer refused to give Kevin his money back. Kevin repaired the car himself and drove it on

the highway, where it was wrecked. Kevin sued Star, and the trial court awarded him the full price of the

car, because he was a minor when he bought it. Star appealed.

Issue: Is Kevin Green entitled to disaffirm the contract even though the Camaro has been destroyed?

Question: Star Chevrolet either did not know that Green was entitled to his money back, or knew but

refused to honor it. Why was that a particularly costly mistake by Star?

Question: Why was Kevin Green permitted to keep the insurance proceeds and his purchase price?

Answer: Because of the collateral source rule, which states that a defendant that is found to owe a

Question: Kevin Green knew that he was a minor. Why should he be allowed to make an

agreement, wreck a car, and then get his money back?

Answer: The policy behind the court’s ruling was to discourage businesses from entering into

Reality of Consent

Fraud

The distinction between misrepresentation and fraud lies in intent. Misrepresentation can occur

innocently, without awareness of a statement’s falsity. If the defendant knows a statement of fact is false,

or is uncertain whether it is true and intends that the other party rely on the statement, then there is fraud.

10 Unit 2 Contracts and the UCC

To recover from fraud, the injured person must show the following:

1. The defendant knew that his statement was false, or that he made the statement recklessly and

Additional Case: Hoffman v. Stamper7

Facts: Plaintiffs alleged that Robert Beeman purchased dilapidated houses in poor sections of Baltimore,

searched for unsophisticated, low-income buyers, and promised them a renovated home for a mere $500

down payment. Beeman had the buyers sign contracts for greatly inflated prices and arranged 100%

purchase financing through an accomplice working in a mortgage company. To support this financing

Arthur Hoffman, a real estate appraiser, supplied an appraisal at exactly the sales price. When the buyers

took possession they found none of the promised repairs had been made. They sued multiple defendants

for fraud and the trial court awarded them compensatory and punitive damages. Hoffman appealed.

Issue: Did Hoffman commit fraud?

Holding: Judgment affirmed. Hoffman’s fraud was amply supported by the evidence. The court stated

“[p]laintiff Beeman purchased a property for $14,500 and sold it three weeks later to McFadden for

$52,000, without any change in its physical condition. Knowing these facts Hoffman appraised the

property’s value at $52,000. Hoffman misstated the zoning applicable to and physical condition of

properties. He reported distant and dissimilar properties as comparable sales. [The court recited other

evidence showing Hoffman’s knowledge of the falsity of material statements of fact and his willing

participation in the fraudulent scheme.]”

Question: What is “flipping?”

Question: Is flipping illegal or inherently fraudulent?

Answer: No. Flipping can be a legitimate method for taking advantage of market inefficiencies.

Question: What made this flipping scheme fraudulent?

Answer: The defendants colluded to (a) purchase run-down housing, (b) locate unsophisticated

buyers with mortgage loan obligations and run-down housing for which they had grossly overpaid.

Question: What is “100 percent financing?”

Question: What was Hoffman’s role in this scam?

Question: What is an appraisal?

Answer: An appraisal is an independent expert assessment of the market value of property, based on

Question: Why were Hoffman’s appraisals fraudulent?

Answer: Hoffman’s appraisals were not independent—he reported values according to what was

Chapter 10 Legality, Consent, and Writing 11

Plaintiff’s Remedies for Fraud

In the case of fraud, the injured party generally has a choice of rescinding the contract or suing for

damages or, in some cases, doing both.

Mistake

A mistake can take many forms. It may be a basic error about an essential characteristic of the thing being

Bilateral Mistake

A bilateral mistake occurs when both parties negotiate based on the same factual error. If the parties

contract based on an important factual error, the contract is voidable by the injured party

Unilateral Mistake

mistake. In these cases it is more difficult for the injured party to rescind a contract.

Duress

If one party makes an improper threat that causes the victim to enter into a contract, and the victim had no

Written Contracts

Common Law Statute of Frauds: Contracts That Must Be in

Writing

A plaintiff may not enforce any of the following agreements, unless the agreement, or some memorandum

of it, is in writing and signed by the defendant. The agreements that must be in writing are those:

• For any interest in land

Purpose of the Statute of Frauds

whether the parties intended to make a contract.

Question: Why has the statute of frauds historically included the six types of contract listed in the text?

Question: What is the effect of the statute of frauds?

Answer: It makes an oral agreement to which it applies unenforceable.

Question: Is unenforceable the same as void?

Question: What is the difference between an unenforceable contract and a void contract?

12 Unit 2 Contracts and the UCC

Answer: The difference is that if the parties do perform the contract, it makes no difference that it was

Question: Is it still true today that the most valuable contracts must be in writing?

Ethics and Oral Agreements

The text poses these questions, based on the hypothetical appearing in the chapter opening:

The law permits Perry to keep all of the lottery money. Is that right? Does Perry have a moral right to

deny Oliver his half-share, when we know the two friends had agreed? Is the statute of frauds serving a

useful purpose here? Remember that Parliament passed the original statute of frauds believing that a

written document would be more reliable than the testimony of alleged witnesses. If we permitted Oliver

to enforce the oral contract, based on his testimony and that of the witnesses, would we simply be inviting

other plaintiffs to conjure up lottery “contracts” that had never been made?

There are no perfect answers to the questions posed. Clearly the British Parliament is persuaded that the

evil of the statute largely outweighs the good, which is why it has eliminated the writing requirement for

most contracts. In support of eliminating the statute:

• Oliver and Perry had many unbiased witnesses who could demonstrate that the parties arrived at a

forth?

In support of retaining the statute:

• A writing forces one to be cautious in making deals. The statute of frauds reminds the parties that

Additional Case/Landmark Case: The Lessee of Richardson v. Campbell 8

Facts: A tenant had rented land from Richardson. However, Campbell claimed the property was

really his. Unless the tenant could prove that Richardson owned the land, he would have no right to

stay there. Richardson’s tenant offered a deed (which was then called a patent) to support his claim;

8 1 U.S. 10, Supreme Court of Pennsylvania, 1764