Chapter 15 – Illegality


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  • The hyperlink is to the Kansas Supreme Court’s opinion.
  • The “winner” here was the worker, Cesar Martinez Corral, who was awarded back wages, but faced deportation. According to John Hanna in an article published March 24, 2007, in the Lawrence Journal-World ( : “The company argued, The company argued that Corral had accepted lower pay - and a place to live - until business at the restaurant picked up. The restaurant eventually closed in May 2004, costing Corral his job after seven months, said Diane Barger, an attorney representing Coma Corp.”
  • The hyperlink is to the case opinion.
  • The defendant medical practice had tried to register the company, but there was a technical flaw and the state corporate filings division had mailed the documents to the wrong address. Once the practice discovered the error, it was promptly corrected. These are the type of facts that create a de factor corporation rather than a de jure (by law) corporation. This subject will be discussed in greater detail in later chapters.
  • Court: “Plaintiffs argue that the covenants are reasonable both as to duration and geographic extent…. Defendants provide no unique services nor possess any extraordinary skills that could harm plaintiffs if they continue to work for the Red Bull or for any other employer in the soccer industry.…Plaintiffs have no legitimate protectable interest in preventing defendants from continuing to teach children how to play soccer…. In the current case, however, the balancing of the equities supports denial of plaintiffs’ application for injunctive relief. If plaintiffs’ application is granted, defendants will be …barred from working for any comparable business in any capacity in any part of the world. Five of the six defendants will also be forced to leave the United States because their visas depend upon their employment. This would create an oppressive and unfair scenario for defendants.” .
  • Hyperlink is to the case opinion on the website. Court: “At issue on this appeal is the validity of an exculpatory agreement that a police recruit was required to execute by the Somerset County Police Academy (Academy) as a condition of participation in the Academy's training program. The recruit was injured during the training and filed a lawsuit claiming a dangerous condition of property and inadequate supervision. In response, the Academy successfully invoked the exculpatory agreement on its motion for summary judgment and the Appellate Division affirmed. We now reverse and remand. We hold that the exculpatory agreement is invalid because it contravenes public policy as expressed in the New Jersey Tort Claims Act, N.J.S.A. 59:1-1 to 59:12-3 (Tort Claims Act).”
  • The photo is of a pre-natal ultrasound.
  • Even if agreements to arbitrate can be enforced, a court may decline to enforce an arbitration provision in the absence of a consensual agreement or in instances of undue influence or other unfairness at the time of contract. Determination of unconscionability is fact-specific. Court found this particular arbitration agreement unconscionable for several reasons: patient never received a copy of signed agreement with fifteen-day right to cancel (Moore not apprised of her rights to cancel), agreement contained waivers of persons not parties to the agreement (patient’s husband and the unborn child), and agreement contained a one-sided waiver of rights in which patients agreed to arbitrate claims against other medical providers who were not parties to the agreement
  • True. False. No remedy for breach of an illegal agreement. False. Courts enforce a non-competition clause if : i t serves a legitimate business purpose; the restriction is reasonable in time, geographic area, and scope; and it does not impose an undue hardship.
  • The correct answer is (c) The correct answer is (a)
  • Chapter 15 – Illegality

    1. 1. C H A P T E R 15 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 15-1
    2. 2. Learning Objectives• Explain the concept of illegality as it pertains to contract law• Identify illegal agreements and discuss the effect of illegality• Analyze effect of non-compete and exculpatory clauses• Explain unconscionability 15-2
    3. 3. Illegality• 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 voluntary consent existed between two parties with capacity to contract• Effect: no remedy for breach of an illegal agreement 15-3
    4. 4. Coma Corporation v. Kansas Departm • Facts & Procedural History: – Coma Corp. (Coma) entered into employment contract with undocumented worker for above-minimum wage, but paid less than agreed amount, then fired worker – Worker filed claim with Dept. of Labor (DOL), which awarded above-minimum wages – Coma appealed; court reduced DOL’s award to minimum wage due to illegality of contract 15-4
    5. 5. Coma Corporation v. Kansas Department of Labor• The Appeal to Kansas Supreme Court: – Coma’s argument: employment contract unenforceable and federal immigration laws preempt state wage laws – Court: federal preemption not presumed, and to deny enforceability of employment contract would contravene Kansas public policy to protect wages and wage earners – Reversed in favor of KS Dept. of Labor 15-5
    6. 6. Agreements That Violate Statutes• 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 15-6
    7. 7. Agreements That Violate Public Policy• These agreements 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 – Agreements in restraint of competition 15-7
    8. 8. Licensing Statutes• 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 15-8
    9. 9. 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 15-9
    10. 10. 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 de facto corporation 15-10
    11. 11. 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 15-11
    12. 12. Agreements in Restraint of Competition• 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 15-12
    13. 13. Non-competition clauses• 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: Nasc Services, Inc. v. Jervis in which the clause would “create an oppressive and unfair scenario” for former employees 15-13
    14. 14. Exculpatory Clauses• An exculpatory clause (a release or liability waiver) in a contract attempts to protect one party from liability for damages• Exculpatory clauses may be suspect on public policy grounds, but courts will not interfere if waiver is not a threat to public health or safety – Example of a clause in contravention of public policy: Marcinczyk v. State of New Jersey Police Train 15-14
    15. 15. Unconscionable Agreements• Unconscionability means the absence of meaningful choice together with terms that are unreasonably advantageous to one of the parties• Courts refuse to grant equitable remedy of specific performance for breach of contract if contract is oppressively unfair 15-15
    16. 16. Unconscionable Agreements• 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: Moore v. Woman to Woman Obstetrics & Gynecology 15-16
    17. 17. Moore v. Woman to Woman Obstetrics & Gynecology• Facts: – Moore had a high risk pregnancy and was referred by defendant medical practice group to another gynecologist – Before treatment, Defendant required Moore to sign an agreement to arbitrate all claims, including pre-dispute medical malpractice claims – Moore gave birth to a baby with Down Syndrome and sued for malpractice 15-17
    18. 18. Moore v. Woman to Woman Obstetrics & Gynecology• Appellate Decision: – Trial court compelled Moore to arbitrate, but appellate court reversed, holding that: 2.Pre-dispute agreements to arbitrate claims for medical malpractice could be enforceable as matter or law and were not contracts of adhesion 3.However, in this case, several factors made this agreement unconscionable and unenforceable 15-18
    19. 19. Contracts of Adhesion• 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 15-19
    20. 20. 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 15-20
    21. 21. 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 15-21
    22. 22. Thought Question• Is the enforcement of non-competition clauses in employment agreements a good public policy? 15-22