Illegality “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

Learning Objectives Meaning of illegality Types of illegal agreements Effect on contracts Special doctrines

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 there was voluntary consent between two parties who have capacity to contract Effect: no remedy for breach of an illegal agreement Illegality

Agreements that violate a statute Agreements that 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 Example: Riggs v. Woman to Woman P.C. –Agreements in restraint of competition Types of Illegal Agreements

If sole purpose of an agreement is to restrain competition, it violates public policy A non-competition clause restrains competition, but courts enforce the clause if: –It serves a legitimate business purpose, –Restriction is reasonable in time, scope, and geographic area –It does not impose an undue hardship Agreements in Restraint of Competition

In general, courts refuse to enforce and unconscionable contract –A contract with the absence of meaningful choice and terms unreasonably advantageous to one of the parties UCC 2–302 gives courts power to refuse to enforce or modify unconscionable contracts for sale of goods –See Circuit City Stores, Inc. v. Mantor Unconscionable Agreements

A contract of adhesion, usually a contract on a standardized form, is offered by a party who is in a superior bargaining position on a “take-it-or-leave-it” basis An exculpatory clause (release, liability waiver) in a contract attempts to protect one party from liability for damages Courts enforce these contracts unless effect is overly harsh or oppressive Adhesion & Exculpatory Clauses

Writing “A verbal contract isn’t worth the paper it’s written on.” Samuel Goldwyn, quoted in The Great Goldwyn (Alva Johnson, 1937)

Learning Objectives Significance of a writing in contract law The Statute of Frauds Contracts covered by the Statute of Frauds and the requirements The UCC & the Statute of Frauds The Parole Evidence Rule

In general, a writing is not required to create a legally enforceable contract Writing may be required by Statute of Frauds –Enacted in 17 th century England to prevent fraud by requiring written evidence –American states adopted similar statutes A contract is unenforceable if it does not satisfy the statute of frauds Basics

Collateral contracts Contracts for real estate Contracts for more than one year Contracts for sale of goods over $500 Executor’s promise Marriage as consideration Covered Contracts

Collateral contracts in which a guarantor promises to perform an obligation of a principal debtor to a third person (obligee) –Exception: under the main purpose or leading object rule, no writing required if guarantor makes a collateral promise for main purpose of obtaining personal economic advantage –See Wintersport Ltd. v. Millionaire.com, Inc. Collateral Contracts

A writing is required for contracts for the transfer or sale of an interest in real estate –Some states require a writing for leases and certain easements on real property Real Estate & Sale of Goods UCC requires a writing for contracts for the sale of goods for a price of $500 or more

A writing is required for bilateral contracts that cannot be performed within a year from the date of their formation (one year rule) –Likelihood of full performance is irrelevant Test: is performance possible within year? –Example: If Jack signs contract to consult with Company X on a 13 month project, the contract must be in writing to be enforceable The One Year Rule

Most states require signed memorandum of parties’ agreement stating essential terms: –(a) identity of parties, (b) subject matter identified with reasonable certainty, and (c) signed by the party to be charged –Need not be made at time contract is made Convention on International Sale of Goods does not require writing to enforce a contract Satisfying the Statute of Frauds

Parol evidence rule provides that, when parties enter a written contract they intend as a complete integration (final statement of agreement), a court will not allow evidence of prior or contemporaneous statements to alter or contradict terms of written contract Parol evidence is admissible to explain ambiguities or allegations of fraud The Parol Evidence Rule

Rights of Third Parties “The best minute I spend is the one I invest in people.” Kenneth Blanchard, The One Minute Manager (1993)

Learning Objectives Assignment of Contracts Delegation of Duties Third-Party Beneficiaries

Sometimes a person who entered into a contract must transfer contract rights or duties to another person (third party) Transfer of a right under a contract is called an assignment Appointment of another person to perform a duty under a contract is called a delegation Overview

Assignment will not be effective if it: –Is contrary to public policy –Violates a non-assignment clause in a contract See Managed Health Care Associates v. Kethan –Adversely affects obligor in significant way –Involved a personal relationship or element of personal skill or character Limitations on Assignment

Assignment extinguishes assignor’s right and transfers it to assignee, but delegation of a duty does not extinguish the duty owed by delegator to obligee –Delegator remains liable to the obligee unless obligee agrees to substitute new party for delegator by novation –In an effective delegation, performance by the delegatee will discharge the delegator Limitations on Delegation

Duties not delegable if delegation: –Is contrary to public policy –Violates non-assignment clause in contract –Adversely affects obligee in significant way –Involved a personal relationship or element of personal skill or character Limitations on Delegation

If parties to a contract intended to benefit a third party, courts permit third party (third-party beneficiary) to enforce the contract –Referred to as third-party beneficiary –See Locke v. Ozark City Board of Ed. Incidental beneficiary is one obtaining a benefit as unintended by-product of a contract –No rights under contract Third-Party Beneficiaries