A. Agreements Are Illegal Either Because

ILLEGALITY

I. Meaning of Illegality A. Agreements are illegal either because 1. The legislature has declared that particular type of contract to be unenforceable or void; or 2. The agreement violates a public policy that has been developed by courts or manifested in other sources of law B. Courts consider the importance of the public policy involved and the extent to which the enforcement of the agreement would interfere with that policy 1. Public policy = ideas about promoting public welfare 2. Straub v. B.M.T.: a contract that relieves a father of his obligation to support his child violates public policy (contradicts the promotion of the public welfare) II. 3 Main Categories of Illegal Agreements A. Agreements in violation of statutes 1. Declared illegal by statutes; or a. State legislatures sometimes enact statutes that expressly declare certain types of agreements to be void or voidable b. Examples i. Surrogate birth contracts: declared void by an Indiana statute (note that they are not necessarily void in all states) ii. Usury: federal law and most state law sets limits on the amount of interest that can be charged for a loan or forebearance iii. Wagering statutes: all states either completely bar or regulate wagering or gambling 2. Violate public policy of a statute a. Agreements to commit crimes: contracts requiring the violation of a criminal statute are illegal b. Agreements promoting violations of statutes: if a person is aware of another person’s illegal purpose of entering into the contract and actively helps to accomplish the purpose, an otherwise legal agreement (such as the sale of goods), will be illegal c. Licensing laws: if a person without a license enters into an agreement, the enforceability depends on the type of law requiring the license i. Regulatory laws (protect the public against certain behavior): an agreement by someone without a license is unenforceable ii. Revenue-raising (purpose is to collect $ rather than protect the public): agreement by someone without a license will generally be enforced B. Agreements that may be in violation of public policy articulated by courts 1. Agreements in restraint of competition a. If the sole purpose of an agreement is to restrain competition, it violates public policy and is illegal b. If the restriction is part of an otherwise legal contract, it may be upheld – Courts look to whether: i. The clause serves a legitimate business purpose ii. The restriction on competition is reasonable in time, geographic area, and scope; and iii. The clause does not impose undue hardship c. Some states prohibit non-competition clauses in employment contracts unless the employer can show i. It entrusted the employee with trade secrets or confidential information; or ii. Its goodwill with near permanent customers is threatened d. Also courts bar such clauses that restrict employees from engaging in an occupation that involves relatively simple, repetitive tasks (I.e., salespersons, barbers, and auto trim repair persons) 2. Exculpatory clauses a. Exculpatory clauses relieve one party of civil liability for injury to another party b. General rules: courts will not uphold clauses if they i. Protect a party from liability for any wrongdoing greater than negligence ii. Exclude tort liability on the party of a party who owes a duty to the public (I.e., an airline) iii. Relieve statutorily imposed obligations that benefit one party to the contract (such as worker’s compensation and landlord-tenant laws) iv. Are unconscionable, a contract of adhesion, or are the product of abuse of superior bargaining power (courts focusing on whether the party with inferior bargaining power gave knowing consent); in Leon v. Family Fitness Center, the court looked factors such as a) Font size b) Heading that serves as an alert c) Bold lettering d) Title of the document e) Clarity 3. Affecting family relationships a. Because the family is a valued institution, agreements that tend to interfere with family relationships will be considered illegal b. Examples i. Agreements to divorce a spouse ii. Agreements not to marry C. Unconscionable agreements and contracts of adhesion 1. Unconscionability (oppressively unfair terms) a. Both the UCC and the Restatement 2d recognize unconscionability as a reason to refuse to enforce contracts b. If a court finds terms unconscionable, it can i. Refuse to enforce the entire agreement ii. Refuse to enforce just the unconscionable provision; or iii. Limit the application of the unconscionable clause c. Types i. Procedural: unfairness in the bargaining process (I.e., fine print, buried or hidden terms, legalistic language, etc.) ii. Substantive: unreasonably one-sided terms or unjustifiably harsh terms 2. Contracts of adhesion a. Adhesion contract = usually form contracts that require a party with inferior bargaining power to “take or leave” the terms b. Can take 2 different forms i. Contain terms that are harsh or oppressive; or ii. Contain terms to which the adhering party could not be expected to have known he or she was agreeing iii. Ramirez v. Circuit City Stores, Inc.: adhesion contracts that allow the stronger party to seek redress through the courts while requiring the weaker party to undergo arbitration and that preclude class actions are unconscionable and unenforceable III. Effect of Illegality A. Generally courts refuse to give any remedy to either party of an illegal agreement B. EXCEPTIONS (when courts will provide a remedy even though the agreement is illegal) 1. Excusable ignorance of facts or legislation (but person claiming damages will not recover for anything he or she does after learning of the illegality) 2. A party did not share equally in the wrong (less guilty parties) are entitled to receive what they have parted with under the agreement 3. Rescission before performance of the illegal act (can recover any consideration provided) 4. Divisible contracts (if part of an agreement is legal and part is illegal, court will enforce the legal part only if it is possible to separate it from the illegal part)