Illegal Bargains

Illegal Bargains

1. The subject matter of a contract must be legal in order for the contract to be enforceable.
When parties enter into a contract to do something that violates the law or public policy, the
courts will not enforce the agreement nor provide a remedy for the party who is harmed by
the agreement.

a. Violation of licensing statutes: Every state has laws that require a license in order to
work in certain trades and professions. For example, in order to practice law, medicine,
or accounting, a person must be tested and licensed by the state of California. What
happens when a person who is not officially licensed enters into an employment contract
with a client and delivers professional services? Is that person entitled to payment for the
services that were provided? The answer depends on whether the purpose of the
licensing statute is to raise revenue for the state or whether there are regulatory
objectives. Regulatory laws are designed to insure that the practitioners are qualified,
have kept up to date with changes in the profession, and are members in good standing.
If a person provides professional services in violation of a regulatory licensing statute,
he or she cannot sue for compensation. If a person renders services in violation of a
revenue-generating statute, a claim for compensation will be honored.

b. Violation of gambling statutes: Every state has laws regulating the wagering industry.
If an agreement is made between two people to make a bet on the outcome of a sporting
event in a state where private gambling is illegal, the contract will not be enforced.

c. Usury statues: Many states have laws placing a maximum limit on the interest that may
be charged on a loan. These laws vary significantly depending upon the type of loan, the
type of borrower, etc. States also vary in the remedies available when a usury statute is
violated. In some states, the lender will forfeit both the principal and the interest; in
others only the interest will be forfeited; and in still other states, only that portion of the
interest payment that exceeds the statutory limit will be forfeited.

2. Violations of public policy: Very often courts will declare contracts to be void because they
violate public policy. Violation of public policy includes contracts that restrain trade, excuse
a party from liability for his or her own negligence, unconscionable agreements, involve
tortious conduct, or tend to corrupt public officials.

a. Restraint of Trade: A contract restrains trade if it eliminates or tends to eliminate
competition or obstructs trade or commerce. One common form of restraint of trade is
an agreement not to compete.

1) Sale of a business: When a well established and successful business is sold, it is often
customary for the new buyer to require the seller not to compete in the same type of
business in the same territory for a specified period of time. This is done because the
original owner developed a popular following (good will) which was one of the
things purchased by the new owner, and he or she has the right to protect this interest.

Example: Sam, the owner of a popular restaurant, sold it to Wilma. Wilma required
Sam to sign an agreement not to open a new restaurant in town for three years.

Analysis: The court will require that the agreement not to compete be reasonable as
to time, geography, and the hardships it imposes on the party being restrained and the public. In this instance, since the restaurant was well known throughout the city, a
promise not to open a restaurant within the city is probably appropriate. A state-wide
ban, on the other hand, would not be appropriate, since most of the clients of this
restaurant came from within the city. A three-year period seems like a long time, but
if the restaurant has been an established fixture in the city’s social life, it may be
appropriate. A ban of ten years from the restaurant business probably would not.

2) Employment contracts: Contracts in which employees agree not to join a competing
business in the same geographical area for a specified period of time are also
common. Since these agreements have the potential of placing a person out of work,
courts will examine these agreements with special care. The former employers who
wish to enforce these agreements will have to prove why they are required and why
they are reasonable (to protect trade secrets, customer lists, etc).

b. Exculpatory clauses: Exculpatory clauses are designed to protect a person from the
result of his or her negligence that injures someone else. Courts are especially careful
when reviewing such self-serving agreements and require that the notice be posted
clearly and in a conspicuous location.

Example: A ski resort may post signs that warn skiers that the resort will not be
responsible for injuries suffered by skiers due to protruding rocks along the ski run.
1) Exculpatory clauses cannot protect against harmful acts done intentional or
recklessly.

c. Unconscionable contracts: Courts have the power to examine a contract to see if it is
unconscionable. The word unconscionable as used in the context of contracts has never
really been defined. The courts tend to look at the relative bargaining power of the
parties in deciding whether the one-sidedness of a contract was the result of legitimate
negotiation and acceptance or whether one party was simply forced to accept terms that
were unreasonable because the party had no choice.

2. Violations of public policy: Very often courts will declare contracts to be void because they
violate public policy. Violation of public policy includes contracts that restrain trade, excuse
a party from liability for his or her own negligence, unconscionable agreements, involve
tortious conduct, or tend to corrupt public officials.

a. Restraint of Trade: A contract restrains trade if it eliminates or tends to eliminate
competition or obstructs trade or commerce. One common form of restraint of trade is
an agreement not to compete.

1) Sale of a business: When a well established and successful business is sold, it is often
customary for the new buyer to require the seller not to compete in the same type of
business in the same territory for a specified period of time. This is done because the
original owner developed a popular following (good will) which was one of the
things purchased by the new owner, and he or she has the right to protect this interest.

Example: Sam, the owner of a popular restaurant, sold it to Wilma. Wilma required
Sam to sign an agreement not to open a new restaurant in town for three years.

Analysis: The court will require that the agreement not to compete be reasonable as
to time, geography, and the hardships it imposes on the party being restrained and the public. In this instance, since the restaurant was well known throughout the city, a
promise not to open a restaurant within the city is probably appropriate. A state-wide
ban, on the other hand, would not be appropriate, since most of the clients of this
restaurant came from within the city. A three-year period seems like a long time, but
if the restaurant has been an established fixture in the city’s social life, it may be
appropriate. A ban of ten years from the restaurant business probably would not.

2) Employment contracts: Contracts in which employees agree not to join a competing
business in the same geographical area for a specified period of time are also
common. Since these agreements have the potential of placing a person out of work,
courts will examine these agreements with special care. The former employers who
wish to enforce these agreements will have to prove why they are required and why
they are reasonable (to protect trade secrets, customer lists, etc).

b. Exculpatory clauses: Exculpatory clauses are designed to protect a person from the
result of his or her negligence that injures someone else. Courts are especially careful
when reviewing such self-serving agreements and require that the notice be posted
clearly and in a conspicuous location.

Example: A ski resort may post signs that warn skiers that the resort will not be
responsible for injuries suffered by skiers due to protruding rocks along the ski run.

Exculpatory clauses cannot protect against harmful acts done intentional or
recklessly.

c. Unconscionable contracts: Courts have the power to examine a contract to see if it is
unconscionable. The word unconscionable as used in the context of contracts has never
really been defined. The courts tend to look at the relative bargaining power of the
parties in deciding whether the one-sidedness of a contract was the result of legitimate
negotiation and acceptance or whether one party was simply forced to accept terms that
were unreasonable because the party had no choice.