2. P A R T P A R T Contracts Introduction to Contracts The Agreement: Offer The Agreement: Acceptance Consideration Reality of Consent 3 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3. P A R T P A R T Contracts Capacity to Contract Illegality Writing Rights of Third Parties Performance & Remedies 3 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

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

5. Learning Objectives  Meaning of illegality  Types of illegal agreements  Effect on contracts  Special doctrines 15 - 5

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 there was voluntary consent between two parties who have capacity to contract  Effect: no remedy for breach of an illegal agreement Illegality 15 - 6

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 - 7

8.  Agreements that violate public policy include:  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 - 8

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 - 9

10. Riggs v. Woman to Woman, P.C.  Facts & Procedural History :  Riggs joined defendant medical practice after assurances that the medical practice was a licensed professional corporation  Employment agreement contained a covenant not to compete  Riggs discovered that defendant was not a licensed professional corporation 15 - 10

11. Riggs v. Woman to Woman, P.C.  Issue & Court’s Discussion :  Was the employment agreement void because defendant was not licensed?  Defendant properly attempted to obtain the license and when it determined it was not properly licensed, it remedied the situation and obtained the license  Had operated as a de facto corporation 15 - 11

12. Riggs v. Woman to Woman, P.C.  Court’s Analysis & Ruling :  Purpose of the licensing act is permissive – to allow a medical practice the protections of a corporation; not to protect the public  Since defendant did nothing illegal, the contract is not void 15 - 12

13.  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 - 13

14.  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: Jay’s Custom Stringing, Inc. v. Yu in which the clause was impermissibly broad and unenforceable Non-competition clauses 15 - 14

15.  Under the doctrine of unconscionability, courts refuse to grant the equitable remedy of specific performance for breach of contract if the contract is oppressively unfair  Unconscionability means the absence of meaningful choice together with terms unreasonably advantageous to one of the parties Unconscionable Agreements 15 - 15

16.  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: Circuit City Stores, Inc. v. Mantor  Company pressured and threatened employee to sign an agreement to arbitrate in the event of dispute, but court believe it had gone too far  Clause was unconscionable, therefore the contract was unenforceable Unconscionable Agreements 15 - 16

17.  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 - 17

18.  An exculpatory clause (a release or liability waiver) in a contract attempts to protect one party from liability for damages  Exculpatory clauses are perhaps suspect on public policy grounds, but courts do not want to interfere with the agreement if it does not threaten public health or safety Exculpatory Clauses 15 - 18

19. Test Your Knowledge  True=A, False = B  An agreement that promotes violating an environmental permit is illegal  A person can demand restitution for breach of an illegal agreement  Non-competition agreements are illegal agreements 15 - 19

20. Test Your Knowledge  Multiple Choice  A contract of adhesion:  (a) is always illegal  (b) are contrary to public policy  (c) is a “take it or leave it” agreement  An exculpatory clause:  (a) Protects one party from liability for damages  (b) Promotes violation of a civil law  (c) Is contrary to public policy and illegal 15 - 20

21. Thought Question  Do you think enforcing non- competition clauses in employment agreements is good public policy? 15 - 21