15-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Introduction to Contracts The Agreement: Offer The Agreement: Acceptance Consideration Reality of Consent Contracts P A R T

Capacity to Contract Illegality Writing Rights of Third Parties Performance and Remedies Contracts P A R T

15-4 Illegality PA E TR HC 15 In a free society the state does not administer the affairs of men. It administers justice among men who conduct their own affairs. Walter Lippman

15-5 Learning Objectives Explain the concept of illegality as it pertains to contract law Identify illegal agreements and discuss the effect of illegality Analyze effect of non-compete and exculpatory clauses Explain unconscionability

15-6 An agreement will be unenforceable because of illegality if the agreement involves an act or promise that violates a law or is against public policy –Even if voluntary consent existed between two parties with capacity to contract Effect: no remedy for breach of an illegal agreement Illegality

15-7 Sometimes government legislatures enact statutes that declare certain types of agreements unenforceable, void, or voidable Examples: –New law changes the limits allowed for interest to be charged on a loan –New law prohibiting creation of a landfill in environmentally sensitive areas Agreements That Violate Statutes

15-8 These agreements violate public policy: –Agreements to commit a crime –Agreements promoting an illegal purpose –Agreement to perform an act for which the person is not properly licensed –Agreements in restraint of competition Agreements That Violate Public Policy

15-9 A common regulatory statute requires a person to obtain a license, permit, or registration before engaging in a certain business or profession If the purpose of the statute is to protect the public against dishonest or incompetent practitioners, then an agreement is unenforceable if an unlicensed person agrees to do an act that requires a license Licensing Statutes

15-10 If the sole purpose of an agreement is to restrain competition, it violates public policy and is illegal If the restraint on competition was part of an otherwise legal contract, the result may be different because the parties may have a legitimate interest to be protected by the restriction on competition Agreements in Restraint of Competition

15-11 Courts enforce a non-competition clause if: –It serves a legitimate business purpose, –The restriction is reasonable in time, geographic area, and scope –It does not impose an undue hardship Example: Nasc Services, Inc. v. Jervis in which the clause would “create an oppressive and unfair scenario” for former employees Non-competition clauses

15-12 An exculpatory clause (a release or liability waiver) in a contract attempts to protect one party from liability for damages Exculpatory clauses may be suspect on public policy grounds, but courts will not interfere if waiver is not a threat to public health or safety –Example of a clause in contravention of public policy: Marcinczyk v. State of New Jersey Police Training CommissionMarcinczyk v. State of New Jersey Police Training Commission Exculpatory Clauses

15-13 Unconscionability means the absence of meaningful choice together with terms that are unreasonably advantageous to one of the parties Unconscionable Agreements Courts refuse to grant equitable remedy of specific performance for breach of contract if contract is oppressively unfair

15-14 UCC 2–302 gives courts power to refuse to enforce all or part of a contract for the sale of goods or to modify such a contract if it is found to be unconscionable Example: Moore v. Woman to Woman Obstetrics & Gynecology Unconscionable Agreements

15-15 A contract of adhesion is a contract, usually on a standardized form, offered by a party who is in a superior bargaining position on a “take-it-or- leave-it” basis Courts will enforce the contracts unless the term is harsh or oppressive Contracts of Adhesion

15-16 Thought Question Is the enforcement of non-competition clauses in employment agreements a good public policy?