Legal Purpose and Proper Form Chapter 10

Which Agreements are Illegal? Agreements that involve contracting for an illegal act generally are void and unenforceable Illegal Lotteries Agreements to pay usurious interest Agreements involving illegal discrimination Agreements that obstruct legal procedures Agreements made without required competency license Agreements that affect marriage negatively Agreements that restrain trade unreasonably Agreements not to compete

Illegal Lotteries Most states either forbid or regulate gambling Usually they have statues which make gambling agreements, typically termed illegal lotteries, void. Lottery has three elements: Prize Chance Consideration Wager—bet on the uncertain outcome of an event

Regulated Lotteries Most states have legalized various forms of gambling under regulated conditions: Casino—most forms of traditional gaming are permitted Pari-mutual betting—form of betting in which those who bet on the winner of a horse race share the total prize pool State-run lotteries—often with millions in the jackpot to be split between the winner(s) and state educational institution Bingo games and pull-tab betting—permitted in many states when conducted by licensed institutions for financing charitable, religious, or educational projects

Agreements to Pay Usurious Interest Almost all states provide that, with certain exceptions, lenders of money may not charge more than a specified maximum rate of interest Generally, penalties specified by these statutes vary In some states lenders cannot collect some or all of the interest Borrower must pay principal Maximum varies among states, 18% is a common maximum Usury—lending money at a rate higher than the state’s maximum allowable rate Criminal Loan Sharks—illegally charge extremely high interest rates, often 50% per month

Legal Interest Legal rate of interest—specified by state statute About ½ of states = 7% per year Other states = 8-12% per year Pawnbrokers/licensed loan companies Small loan rate of interest 36% per year on loans up to $2,000 Dollar amount loaned is relatively small, overhead cost per dollar loaned is high Risk of loss from defaults is high Protects people from loan sharks

Agreements Involving Illegal Discrimination Some agreements are unenforceable because they violate anti-discrimination statutes Example: an agreement between a local motel chain and a local manager not to accept guests of a particular race or national origin would be unenforceable because it violates the 1964 Civil Rights Act Agreements may also be illegal as violations of the Constitution Example: a contract between a residential subdivision developer and a home buyer providing that the buyer would not sell to a member of a particular race would be unenforceable because it violate the Fourteenth Amendment to the Constitution

Agreements that Obstruct Legal Procedures Agreements that delay or prevent justice are void Examples: Pay non-expert witness in a trial to testify, or pay for false testimony Bribe jurors Compounding a Crime--Refrain from informing on or prosecuting an alleged crime in exchange for money or other valuable consideration A court or prosecutor may make a penalty dependent upon a criminal’s making restitution The victim may not make reporting a crime dependent on restitution

Agreements Made Without a Required Competency License All states require that persons in certain occupations and businesses pass exams and receive competency licenses to ensure that they can perform adequately Persons who lack the required competency license may not enforce the contracts they make in doing the regulated work In contrast, if the license is a REVENUE LICENSE, whose purpose is only to raise revenue and not protect the public, contracts made by unlicensed persons are valid Occupations requiring COMPETENCY LICENSES: Plumbers Electricians Beauticians/barbers Teachers Physicians Lawyers Pharmacists Real estate brokers Insurance agents Building contractors

Agreements that Affect Marriage Negatively The law encourages marriage and family life by making agreements that harm or interfere with marriage unenforceable Examples: Paying a citizen to marry an illegal alien to obtain citizenship Paying for your child not to marry someone or at all Paying for someone to divorce their spouse

Agreements that Restrain Trade Unreasonably The U.S. economic system is based on the concept of free and open competition This creates profits for producers and benefits for consumers State and federal laws seek to prevent monopolies and combinations that restrict competition unreasonably Examples of Agreements that Restrain Trade: Price Fixing—when competing firms agree on the same price to be charged for a product Injures consumers--deprives them of the lower prices which competition would produce Resale Price Maintenance—wanting retailers to sell their product at a particular price Can lead to price fixing Allocation of Markets—competitors divide markets between themselves

Agreements not to Compete Price fixing and market allocations are agreements not to compete. One type of agreement not to compete is sometimes enforceable. Employees may agree that they will not compete with their employer after the employment terminates. These agreements are illegal if they are unreasonable in: Time period for the limitation Geographic area to which the limitation applies Employer’s interest protected by the limitation Examples: Not to compete for 20 years Not to compete anywhere in the U.S.

When Will the Courts Enforce Illegal Agreements Most illegal contracts are void and unenforceable When the connection between the illegality and the agreement is slight or a party is relatively innocent of the wrongdoing, or both, the law will allow restitution or the agreement to be enforced in court Examples: Protected victims When the illegal agreement is created by fraud, duress, misrepresentation, or undue influence, the victim may obtain restitution When the law that was violated was designed to protect a party to the agreement (blue sky laws—prohibit the sale of worthless stocks and bonds)

When Will the Courts Enforce Illegal Agreements Examples continued: The excusably ignorant Does not know that the contract is illegal The other party knows that the transaction is illegal The illegality is minor Can either enforce the legal part of the contract or obtain restitution Rescission prior to the illegal act If a party rescinds before the illegal act occurs, then restitution will be available This is designed to create an incentive to stop illegal acts

When Will the Courts Enforce Illegal Agreements Examples continued Divisible Contracts Illegal contracts usually contain a combination of legal and illegal provisions Courts may enforce the legal part of the contract if it is divisible DIVISIBLE—separate consideration is given for the legal and illegal parts INDIVISIBLE—cannot give separate consideration because everything is tied together Unconscionability—when there is a grossly unfair contract that parties under ordinary circumstances would not accept Procedural unconscionability—unfair creation of a contract Substantive unconscionability—unfair terms in the agreement Courts can refuse to enforce the contract or they can enforce the legal part

Why Have a Statute Of Frauds? Although oral contracts are generally valid and binding, because they are subject to fraudulent claims, the law requires that several of the most important types of contracts be placed in writing to be enforceable in court Examples: Transfer an interest in real property (land, buildings, and things permanently attached to them) must be in writing

Contracts within the Statute of Frauds A contract is said to be within the Statute of Frauds if it is required to be in writing Examples: Contracts to buy and sell goods for a price of $500 or more Contracts to buy and sell real property or any interest in real property Contracts that require more than one year to complete Promises to pay the debt or answer for a legal obligation to another person Promises to give something of value in return for the promise of marriage

Contracts within the Statute of Frauds If a contract is within the Statute of Frauds, but there is either no writing or no signature, how courts treat the parties depends on the extent of contractual performance Executed Contract one that has been fully performed Both parties have done all they promised to do Courts leave both parties where they are at—neither party can reverse the contract Executory Contract One that has not been fully performed Something agreed upon remains to be done by one or both of the parties An executory contract within the Statute of Frauds, but not signed in writing, is unenforceable An executory contract in violation of the Statute of Frauds—restitution is available If a benefit was conferred in reliance on the oral agreement, its value can be recovered by suing based on quasi-contract Quasi-contract—some element of an enforceable contract is mission, yet courts award money to prevent the unjust enrichment of one party

Contract within the Statute of Frauds Generally, a writing need not utilize any special form to satisfy the Statute of Frauds as long as it contains certain key elements: Statute of Fraud Requirements: Names of the parties Subject matter description Quantity Price Signature Other essential terms (time, delivery method, terms of payment,etc.) UCC Requirements: Quantity of goods That a contract has been created between the two parties Only the parties whose signatures actually appear on the contract may be sued for enforcement

Types of Contracts within the Statute of Frauds To be enforceable under the Statute of Frauds, five types of executory contracts must be evidenced by a writing and signed by the party against whom the contract is to be enforced Contract for the sale of goods for $500 or more Exceptions according to the UCC: When goods are ordered to be specially manufactured and they are not suitable to be sold to others in the ordinary course of the seller’s business When goods have been ordered and paid for and the seller has accepted payment When goods have been received and accepted by the buyer When the party against whom enforcement is sought admits during legal proceedings that the oral contract was made

Types of Contracts within the Statute of Frauds Contract to sell an interest in real property Transfers of real property or of lesser interests (lease, right to pump oil or cut timber) must be in properly signed writing to be enforceable Exceptions: The court will enforce oral contracts if the seller has delivered the deed or if the buyer has also done all of the following: Made partial or full payments Occupied the land Made substantial improvements to the land

Types of Contracts within the Statute of Frauds Contracts that Require more than one year to complete Courts will not enforce a contract that cannot be performed within one year unless there is a signed writing to prove the agreement The year begins at the time the contract was made, not at the time the contractual performance is to begin This time provision does not apply to agreements that might be executed within one year The test is not whether the agreement is actually performed within one year, but whether there is a possibility of performance within one year

Types of Contracts within the Statute of Frauds Contract to pay a debt or answer for another’s debt Requires a writing for a promise to answer for the debt or default of another Collateral promise—promising to pay if someone else does not Must be in writing Primary promise—promising to pay directly Does not need to be in writing Exception—Main Purpose Rule A third party is liable for an oral promise to pay another’s debt if the main purpose of the promise serves the promisor’s own interest Example: owner of a house under construction is anxious to see it completed. After the building contractor fails to pay on time, the driver of a delivery truck refuses to unload a shipment of lumber. If the homeowner orally promises to pay for needed the supplies, the homeowner cannot defend using the Statute of Frauds

Types of Contracts within the Statute of Frauds Contract for which the consideration is marriage A signed writing is required for agreements in which one party promises to marry in return for something other than the other’s promise to marry If Alice agrees to marry Buck because he promised to deed his house to her, this is within the Statute of Frauds If a parent of the woman promises to pay a dowry to the man, it must be in writing to be enforceable

How are contracts interpreted? At times parties to a written agreement claim that it does not include everything that was agreed upon or is not clear about such terms. In court these claims are settled either by an examination of the document itself or by a set of rules specifically devoted to the interpretation of contracts Integration Clause—a contract clause stating that both parties agree that the terms in the written contract constitute the entire and final agreement “it is agreed that the terms written here constitute the entire and final contract between the parties”

Specific Rules of Interpretation Analysis The first thing a court will do is interpret the contract in terms of the parties’ principal objective By looking at the main objective, courts can see which clauses should prevail over others If an agreement can be interpreted in two ways, the courts will choose the way that renders the agreement a contract Conflicting Terms If there is a conflict between a printed form contract and something typewritten or handwritten thereon, the later writings determine the contracts meaning

Specific Rules of Interpretation Words The plain and normal meaning of ordinary words will be used to determine the meaning of the contract Prior relationships of the parties may indicate how the words should be interpreted Legal and other terms are given their technical meaning unless the contract as a whole shows that a different meaning is intended Authors of Ambiguity Courts will interpret ambiguities against the party who drafted the contract Often consumers are asked to accept and sign contracts of adhesion Credit purchases and life insurance policies Prepared by stronger parties with the help of skilled lawyers Terms are not negotiable Courts interpret ambiguity against the party who drafted the contract

Specific Rules of Interpretation Implied Reasonableness Contracts often include implied terms as a matter of reasonableness Promised services must be performed with reasonable care and skill When no time is mentioned, a reasonable time is allowed Parol Evidence Rule This rule makes the final writing the source of evidence about the terms of the contract Consists of words spoken prior to the execution of the final writing or at the time of signing Generally inadmissible in court

Specific Rules of Interpretation Exception to the Parol Evidence Rule To clarify ambiguities in the written agreement If the written contract was not intended to be a complete agreement If a condition necessary to the existence of the contract never occurred If fraud, forgery, illegality, mistake, or misrepresentation occurred To show the parties reached another agreement or terminated the contract under consideration after executing the written contract To show that the parties contract is voidable because a party lacked contractual capacity