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

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• 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

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• 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

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• 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

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• 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

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• 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

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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 Rule16 - 9

• In general, a writing is not required to create a legally enforceable contract

• Writing may be required by Statute of Frauds– Enacted in 17th 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

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• 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

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• 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

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• 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

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• UCC 2-201 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

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• 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

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• 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

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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

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• 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

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• 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

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• 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

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• 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

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• 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

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