CHAPTER 9
LEGALITY
Nature and Consequences of Legality
 Even if a contract has all the other elements that make
up a valid contract, it may still be invalid if it lacks a
legal purpose.

Violates Statutory Law


Illegality of the action renders the contract void
Parties would be subject to penalty specified under the law(s) violated

Conspiracy—individuals who agree to commit crimes for a promised
consideration
 If it is impossible to separate a contract into separate
parts and if any part of the contract is determined to
be illegal, none of the contract is valid.

Even if some parts of the contract are legally enforceable
Divisible Contracts
 If
certain promises and actions in a contract
can be successfully performed by themselves,
then the contract is said to be divisible.
 The courts may enforce those parts that are
legal and revoke the parts that are not.
A furniture store required an unemployed woman on public assistance to sign
its standard contract for credit every time she made a purchase at the store.
One of the terms of the contract stated that the store would own every item
she purchased until all the items were fully paid. The woman made
several purchases at the store, signing this same standard contract each time.
After several years of making all of her payments, she purchased a couch
and missed 2 payments. The store believed it had the right, under the
contract, to take back all the items the woman ever purchased there.
Is she chained to the contract she signed?
A court of appeals found a portion of
the contract to be unconscionable and
did not enforce this unfair term in the
agreement. The woman had to return
the couch, but she was able to keep all
the items which had already been paid.
In Pari Delicto

In Equal Fault

Both parties knew the agreement was illegal


Neither side can sue for breach of contract
If one party is unaware the law is being broken
and has no intent to break the law, the courts
may grant relief to the “innocent party”
Agreements That Violate Statutes
 State legislatures pass laws declaring that certain
types of agreements are illegal and void because
they violate:

Civil and criminal statutes—agreements that require one
party to commit a tort or a crime


Tort—a private wrong committed against a person (Civil)
Usury statutes—when a lender charges more than the
maximum legal interest rate allowed by state law

Interest is the fee the borrower pays to the lender for using the
money.
Agreements That Violate Statutes:
Gambling Statutes

Gambling agreements in which one party
wins and another party loses, even if some
skill may be involved.

Includes
 Playing cards for money
 Money wagers or bets on elections or sports events
 Buying tickets in a sports pool

Changes in State Laws:
 Betting at racetracks
 Certain forms of off-track betting
 State-run lotteries
Agreements That Violate Statutes:
Gambling Statutes

Lottery

A game that consists of drawing Lots
 Tickets
with different combinations of numbers printed
on them where prizes are distributed to the winners
from the pool of persons buying a chance.

Often, organizations who sell gambling
devices have to donate a percentage of the
profits to charities

VFW, Eagles
Agreements That Violate Statutes:
Sunday Statutes
 In some states, it is illegal to make or
perform contracts on Sunday.

Called Sunday statutes or blue laws.
 The
statutes vary greatly from state to state.
Agreements That Violate Statutes:
Licensing Statutes
 A license is a legal document stating that the holder
has permission from the proper authorities to carry on
a certain trade or profession.

All states have statues that require persons to have a license
to practice certain trades or professions and engaging in
such a trade or profession without a license is illegal.


Some licenses are designed to protect the public from dealing with
unqualified persons.
Some state statutes require licenses simply to raise revenue.
Name a profession that requires a license.
Agreements That Violate Statutes:
Licensing Statutes

In most states the following trade and
professional workers must be licensed.
– Doctors/Nurses/Health Care Workers
– Child Care Workers
– Surveyors
– Funeral directors
– Barbers/Hairdressers
– Plumbers/Electricians
Reviewing What You Learned
Page 193 Questions 1-4
1. What makes a contract illegal?
Illegal contracts may be created in many ways. A contract may be illegal if it
involves an agreement to do something that violates statutory law.
2. What are the consequences of illegality in
relation to contract law?
If the contract cannot be separated into isolated promises and acts that can be
performed independently, the entire contract is rendered illegal. If any part of the
agreement is illegal, a valid contract cannot result. If the contract is divisible the
court may enforce the legal parts of the agreement and revoke the illegal parts.
3. What contracts are illegal by statutory law?
Contracts that violate a state’s civil or criminal statutes, usury statutes, gambling
statutes, licensing statutes, or Sunday statutes.
4. What are the different types of licenses?
Some licenses raise revenue, other are designed to protect the public.
CHPATER 9
Illegal Contracts
Illegal contracts that
•
•
•
•
•
violate state
statutes
violate public
policy
civil and criminal statutes
usury statutes
gambling statues
Sunday statutes
licensing statutes
• agreements that
unreasonably restrain trade
• agreements to obstruct
justice
• agreements inducing breach
of duty or fraud
• agreements interfering
with marriage
Agreements Contrary to Public Policy
 Public Policy is a time-honored legal doctrine. The
basis for making public policy decisions is the
underlying principle that nobody should get away with
doing something that harms the public at large.

If an activity harms the health, safety, welfare, or morals of
the public, that activity violates public policy.
Agreements Contrary to Public Policy

Agreements that unreasonably restrain trade
Contracts not to compete
 Price fixing agreements
 Agreements to defeat competitive bidding


More common agreements include:
Agreements to obstruct justice
 Agreements inducing breach of duty or fraud
 Contracts interfering with marriage

Agreements that
Unreasonably Restrain Trade
 The law protects our rights to make a living
and do business in a market economy.
 A restraint of trade is a limitation on the full
exercise of doing business with others.

Three types of contracts that violate this rule:
1. Agreements not to compete
2. Price fixing
3. Agreements to defeat competitive bidding
Agreements that
Unreasonably Restrain Trade
 Agreements not to compete

When a business owner sells a business, sometimes the
sales contract will include a provision called a restrictive
covenant, which is a promise not to compete.
 The seller of the business will not open a competing
business within a certain area for a period of time after
the sale.


The court will uphold such a restriction if it is reasonable in time
and geographic location.
Promises not to compete are also sometimes found in
employment contracts.

Such contracts are enforced only as necessary to protect the
former employer from unfair competition.
Agreements that
Unreasonably Restrain Trade
 Price fixing occurs when competitors agree on
certain price ranges within which they set their
prices.

Price fixing discourages competition and raises prices.
Q: Is the ever changing price of gasoline at the
pumps price fixing???
Agreements that
Unreasonably Restrain Trade
 Agreements to defeat competitive bidding

A bid is an offer to buy or sell goods or services at
a stated price.

Laws often require governments to construct public
works or buy goods and services through competitive
bidding.


In the process of competitive bidding, rivals submit bids for a
project. The firm with the lowest qualified bid wins the contract.

If the bidders get together and agree not to bid lower than
a certain price, then they are not bidding fairly. These
agreements and contracts are not enforceable.
Agreements that
Obstruct Justice
 Any contract that interferes with the
administration of justice is illegal.

Such agreements include:




Protecting someone from arrest
Encouraging lawsuits
Giving false testimony
Bribing a juror
Agreements Inducing
Breach of Duty or Fraud
 All congressional and state representatives
and all other public officials hold positions of
trust. These officials owe a duty to work for
the best interest of the public.


Any contract that tries to influence the
representatives to use their positions for private
gain is unenforceable.
This rule also applies to private persons who
are in positions of trust.
Agreements
Interfering with Marriage

The law encourages marriages and protects
family relationships.

Contracts that discourage, harm, or interfere
with good family relationships are illegal and
unenforceable in court.

For example, a contract promising money in exchange for
not marrying would be void.
Reviewing What You Learned
Page 199 Questions 1-4
1. What is the legal doctrine of public policy?
No one should be permitted to do anything that harms the public at large.
2. What contracts are considered to be agreements
that are contrary to public policy?
Agreements that involve an unreasonable restraint of trade, agreements
to obstruct justice, agreements inducing fraud or breach of duty; and
contracts interfering with marriage.
3. What types of contracts involve an unreasonable
restraint of trade?
Contracts not to compete, price fixing, and agreements to defeat
competitive bidding.
4. What is a restrictive covenant?
Agreement by the seller of a business not to open a competing business
within a certain geographic area for a certain period of time.