Business Law Principles and Practices Golclman, A ., .docx

Business Law
Principles and Practices
Golclma:n, A ., & Sigismond, W. (2014). Business Law:
Principles and Practices (9th ed.). South-
Western Cengage Learning.
Cengage Advantage
Books
PRINCIPLES AND PRACTICES
emorialize Contracts in
riting Statute ol Frauds
~APTER PREVIEW
e Status of Oral and Written
ntracts
ntracts Required to Be in Writing
- Contract to Personally Pay the Debt of
Another Person
- Contract to Personally Pay the Debt of a
Deceased Person

- Contract Involving the Sale of an Interest
in Real Property
- Contract Made in Consideration of
.Marriage
- Contract That by its Terms Cannot Be
Performed Within One Year of the Date
the Contract Was Formed
e Sufficiency of the Written Record
ectronic Signatures
rol Evidence Rule
201
> ~
CHAPTER
·HIGHLIGHTS
~
IN A BUSINESS
SETTING
This chapter identifies the relatively few contracts that are
required by the Ia·
of each state (called a statute of frauds) to be in writing to be
enforceable in

court. The chapter also summarizes the essential information
that the writing
must contain so as to satisfy the law. A brief opening discussion
points out tr:
advantages that written contracts have over those that are made
orally. This ::
followed by a discussion of parol evidence, a rule determining
whether oral
testimony external to a written contract that changes the terms
of this writter
contract may be introduced at a court trial. The concluding
pages of the
chapter introduce the electronic signature as a way to sign
records.
Adams, an attorney, represented Hall, who called himself an
International Trader,
in a deal with a company in India that was to result in Hall
receiving $10 mi llion .
Adams and Hall resided in the state of Maine. The attorney's fee
of $1 mill ion
for handling the case was to be paid when Hall received his
money from the
company. In order to receive this $10 million, however, Hall
was required to pay
an upfront fee of $100,000 to an agent of the company handling
the deal in India.
Hall had done business with this Indian company on prior
occasions, but the
agent was new to the company. Hall borrowed the fee from

Garlock, a business
associate, and signed a promissory note agreeing to pay back
the $100,000
within five days. Adams made arrangements with a local bank
to wire the money
to the agent in India. Neither Hall nor Adams heard from the
agent once the
money was sent. Adams had orally guaranteed to repay Garlock
if Hall did not
himself repay the debt. When the due date of the note arrived,
Garlock requested
his $100,000, but Hall was unable to make payment. Garlock
therefore brought
a lawsuit against Hall for the money. He hired Adams as his
attorney. The court
awarded damages to Garlock requiring Hall to make payment.
However, Hall had
no assets from which to collect it. During the trial, Adams
publicly reprimanded
Hall during cross-examination for not paying his loan as
scheduled.
Questions
1. Has Adams , as the attorney, acted unethically in this case?
2. Is Adams legally obligated to pay Garlock the $100,000 that
Hall borrowed
from him?
The Status of Oral and Written Contracts
LEARNING OBJECTIVE ~
Indicate that oral contracts are
just as enforceable as
written contracts if they

contain all the required
legal elements.
In most circumstances, oral contracts are just as enforceable as
written contracrs
if they contain all the elements neces sary to make a contract
legally bindin"'
(those discussed in Chapters 7 through 10) and if the terms of
the oral contracts
can be proved in a court of law. In fact, most contracts are not
in writing.
Nevertheless, many lawsuits based on breach of valid oral
contracts have beer:
dismissed by courts because the parties who brought them could
not sufficiently
establish their terms.
Written contracts have advantages over oral contracts . A
written contrac
needs no witnesses to establish its existence and its terms. The
writing is taken a-
proof of the parties' intent to actually contract and to include
certain specifica-
tions of terms within the scope of the contract. If there are no
witnesses to an ora.
contract, one of the parties might deny that the contract ever
existed or mig h-
disagree on the exact terms of the contract. Even if there are
witnes ses to an ora l
contract, they may disagree about the contract's exact terms. To
avoid m isunder-
standings and disagreements and to reduce the possibility of

perjury (lying under
oath) by one party or the other, you should ensure that all
important contracts
are in writing. Keep in mind that putting a contract in writing
does not guaran-
tee that at the time of performance the contract terms will not
be questioned or
become a "battleground" for a major dispute based on an
interpretation of terms
by the parties. The courts still need to decide what the disputed
terms mean.
Relatively few contracts are required by law to be in writing;
those that are re -
quired to be in writing will be discussed in the pages that
follow. Re-creating the
intentions of the parties can be difficult in the absence of a
written agreement.
ontracts Required to Be in Writing
ist the contracts that must be in
writing to be legally
enforceable under a state's
statute of frauds .
ute of frauds: law re quiring that
ain types of contracts be in writing
Every state has a law requiring that to be enforceable in court,
certain kinds of
contracts must be in writing. This law, called the statute of
frauds (based on the

English Statute of Frauds passed in 1677), does not pertain to
all contracts but
only to six specific types. These six contracts, said to be
"within the statute," are
believed to be historically important enough to put into written
form. The stat-
ute of frauds does not eliminate the other essential elements of a
valid contract
(offer and acceptance, consideration, capacity, and legality). It
simply adds there -
quirement of written evidence that a contract existed.
Virtually all statutes of fraud require the following types of
contracts to be
in writing to be enforceable:
1. A contract to personally pay the debt of another person
2. A contract to personally pay the debt of a deceased person
3. A contract involving the sale of an interest in real property
4. A contract made in consideration of marriage
5. A contract that by its terms cannot be performed within one
year from the
date the agreement was formed
6. A contract for the sale of goods or merchandise for the price
of $500 or
more (discussed in Chapter 15)
In addition to these contracts, some states require other types of
contracts to
be in writing . These contracts may include a contract
appointing an agent to sell
real estate, a promise to pay a debt discharged in bankruptcy, or
a promise to be
released from an ordinary debt, as well as various types of

consumer transac-
tions such as a loan of money. If a state statute does not require
that a contract
be in writing, an oral contract is enforceable.
The statute of frauds applies only to executory contracts, that is,
contracts
that have not been fully performed. If, however, two parties
fully perform an
oral contract that should have been in writing, the agreement
would not be void,
but be unenforceable. The contract is valid for all other
purposes. If both parties
elect to go through with their oral agreement, they may, and no
third party may
complain that the contract is oral. Only the original parties to
the contract may
raise this issue.
Randazzo sold Merkel 2 acres of land in the town of Wallworth
for
$100,000 to build a bed and breakfast. The contract had been
made
orally. Shortly thereafter, Randazzo changed his mind and
backed out
of the deal. He returned the purchase price to Merkel and asked
for
the return of the document of ownership for the land. Merkel
refused.
Randazzo then asked the court to void the contract because it
was not in
writing as required by the statute of frauds for a sale of land.
The court
refused, ruling that because the agreement had been fully
performed, the
statute of frauds did not apply.

A Contract to Personally Pay the Debt of Another Person
A contract one person (the guarantor) makes with a creditor to
pay a third per-
son's debt (called a contractual or secondary promise) must be
in writing to be
enforceable. Under this type of agreement, called a guaranty,
the guarantor"s
promise to pay is secondary to the promise of the person who
owes the mone~
(the debtor). That is, the debtor is still responsible for paying
the debt; the guar-
antor is responsible only if the debtor fails to pay. (This type of
contract may be
a bit unusua l because we generally assume that a person does
not normally take
on another person's debt. Therefore, the statute of frauds
requires writte:::.
evidence of this unusual arrangement.) If necessary, the creditor
would first b~
required to sue the debtor and obtain a judgment. A judgment in
this case is a
court order directing the debtor to pay the debt owed to the
creditor. If the debto~
refuses, the creditor could then proceed against the guarantor.
Julian, who recently graduated from college, was hired by a
large firm
as an account executive. Because he needed a car to get to
work, he
went to a car dealer in the large city where he lived and put in a
bid on
a new car. Because Julian did not have a credit history, the
dealer was

unwilling to sell him the car unless a responsible person with
good credit
would guarantee payment. His uncle, a well-known
businessperson in the
same city, agreed in writing to become responsible for any
payments his
nephew failed to make. Because the uncle's promise to pay was
secondar;
(agreed to pay only if the nephew did not), and since the
guarantee to pa!
was in writing, the uncle becomes responsible for any of the
payments his
nephew fails to make.
An agreement does not come within the statute of frauds if you
make your-
self primarily responsible for the payment of a debt. An oral
agreement in t his
case would be enforceable.
Forman said to his friend, the owner of Miles Furniture Mart:
"It is my
daughter's birthday, and she wants the dining room set she saw
at your
store. Go ahead and sell it to her, but send me the bill."
In this example, Forman did not promise to pay if the daughter
did not pay
Instead, Forman assumed primary responsibility for the amount
of the daugh-
ter's purchase . Becailse the debt became Forman's alone, the
owner of Mi les
Furniture Mart would look only to Forman for payment.
A Contract to Personally Pay the Debt of a Deceased Person
An executor or administrator is one who handles the property

(or estate) of
deceased person. The executor or administrator gathers the
assets of the
deceased, pays all debts, and distributes the remaining property
according r
the terms of a will or state law. The executor is not personally
responsible fo~
the debts of the deceased; the debts are paid out of the deceased
person's est ate.
If, however, there is not enough money to pay all the debts, an
executor or
administrator may promise to pay the debts from her or his own
personal fu nds
(such promises are relatively unusual) . Such an agreement,
which is actually a
agreement to become responsible for the debts of another, must
be in writing r
be enforceable.
When he died, Morten had an estate worth $100,000 but owed
creditors
$120,000. Morten's daughter, the executor of the estate, wanted
to clear
her father's name. She made an oral agreement with the
creditors to pay
the additional $20,000 owed by her father out of her own
pocket. This
oral agreement by Morten's daughter was not legally
enforceable by the
creditors.
RYou t eac
A Contract Involving the Sale of an Interest in Real Property

A contract for the sale of real property or any interest in real
property must be in
writing to be enforceable . Real property is land or anything
permanently attached
to the land such as a building. The contract of sale, sometimes
called a purchase
offer, consists of an offer by the buyer and an acceptance by the
seller. The
purchase offer must also contain the other essential elements of
a contract.
Newman placed a sign on her front lawn advertising her house
for sale.
Julian saw the sign, stopped, inspected the house, and orally
offered
Newman the $140,000 asking price. Newman accepted. After
Newman
had taken down the sign and worked out the details of the sale,
Julian
refused to go through with the purchase of the property.
Because the
statute of frauds requires that all contracts for the sale of real
property be
in writing, Julian was not bound by the oral contract.
It is not uncommon for people to enter into oral contracts
involving real
property. If, in the example, Julian made a deposit on the house,
the oral contract
for the sale of the house would still not be enforceable. In the
eyes of the law, the
deposit could be returned without injury to J ulian. On the other
hand, Newman
may have immediately transferred possession of the house to
Julian, with the
deed of ownership to be given later. In this case, if Julian made

improvements to
the house, such as painting and making certain repairs, the law
most likely would
not permit N ewman to cancel the sale and retake possession of
the house be -
cause the agreement was not in writing.
A contract for a temporary transfer of an interest in real
property must also
be in writing. An interest in this sense is a legal right to the use
of or a claim on
real property. Examples of interests include mortgages,
easements, and leases. A
lease is an agreement by which an owner of real property rents
that property to
another party. In most states, an oral lease for a term of one
year or less is valid.
Clinton orally agreed to rent a house from Jeffers for one year.
This oral
agreement does not have to be in writing to be enforceable
because it is
only for one year.
Martson , a retired professional athlete, owned a self-standing
sporting goods store in
a small city of about 50,000 people. He decided to retire
completely and offered to
sell his business, including the building, to a group of investors
headed by a person
named Greeves for $1 million. Greeves, without the aid of an
attorney, drew up a
handwritten purchase and sales agreement, signed it, and sent
the document to
Martson. The document was lacking an important requirement
under the statute of

frauds dealing with real property, namely a complete
description of the property. It
contained only a street address. A short time after Martson
received the document,
Greeves informed Martson that he decided not to go through
with the contract. Mart-
son never did sign the document.
Questions
1. Is Greeves bound by this agreement?
2. Is the fact that Martson did not sign the agreement
significant?
3. Would an attorney have been helpful to the parties in this
case?
A Contract Made in Consideration of Marriage
A person who agrees to marry another for a reason other than a
mutual promise
to marry, must place the agreement in writing. Mutual promises
to marry are
valid contract promises and are enforceable even if there is no
written evidence.
For example, if Gentile and Wright each orally promise and
agree to marry each
other, their agreement is bind ing. If, however, Gentile agrees to
marry Wright
only if Wright will turn over certain property to her, this
agreement will not be
prenuptial agreement: agreement by
a couple plann ing to marry regard ing
the rights and obligations of each
person

enforceable in court unless it is in writing. This type of
arrangement is uncor::.-
mon for a first marriage, but is more common when both parties
are entering ~
second marriage- especially when children and/or significant
assets are i::-
volved. In this case, the parties would sign a prenuptial
agreement . A prenupri.1
agreement is a written contract signed before marriage that
states what w mL.-
happen to a couple's assets after a divorce or death. A prenup,
as it is common
called, does not take effect until the parties marry. Without this
prenuptial agree-
ment, either a divorce court or a probate court would divide up
these as se:
according to state law. Furthermore, once you agree to a prenup,
both pa rri
must disclose all their assets or risk having the entire contract
voided. It is cri'·-
cal to decide on a prenup long before the marriage is to take
place. If the pa
who wants the prenup were to present it to the other party days
before r
marriage and this other party signed, there is a chance that this
other party cou.-
invalidate the document after the marriage claiming there was
not enough ti
to properly consider the consequences.
Whitney and Banks decide to marry. It is a second marriage for
both.
They sign a prenuptial agreement whereby each promises to
waive any
inheritance rights to the other's money and/or property
accumulated up

to the point of their second marriage. Each wishes the children
of his or
her prior marriage to be the sole heirs (those entitled to inherit)
of the
money or property.
In this example, a court will hold the agreement enforceable as
long as W h.--
ney and Banks understood the legal consequences of what they
agreed to do a:--
knew the full extent of each other's property. Courts are
increasingly upholdi~ -
prenuptial agreements, provided they are fair and reasonable
and were enter
into freely (i.e., made without threats).
A Contract That by Its Terms Cannot Be Performed Within
One Year from the Date the Contract Was Formed
A contract must be in writing if "by its terms" it cannot be
carried out exacr
within one year of the date of the contract. If it can be carried
out in exactly o
year, or even less time, an oral contract is valid. The one-year
period starts to r~
the day after the contract is formed. This is referred to as the
"one-year rule." F
example, a nationally -and internationally known singer enters
into a contract
August 10, 2008, to perform in a large city in September 2010.
This com r.::
must be in writing because it cannot be performed prior to
September 2010. Tr
was an easy case. It could get a little more complicated than
that because the Y""
legally begins when the contract is made, not when performance
is to start.

Sullivan, a wealthy cattle rancher, planned to take a year off
and travel
with his family. On March 13, he orally agreed to hire Elridge
for that one
year to take charge of his property and his business interests.
Elridge was
to work from May 1 of that year to April30 of the next year.
Because the
contract cannot be completed within one year of the date of the
agreemetr
(March 13 ), it must be in writing to be enforceable. The date of
May 1 is
significant in determining whether or not the contract has to be
in writin=
The key for determining whether an oral contract is enforceable
under :.
one-year rule is the possibility of performance, not the actual
performance. -:-
statute of frauds does not apply if it is possible to carry out the
terms of the c
tract exactly within one year. For example, Redman orally
promises "to work;
Dykes as a personal security guard for Dykes's lifetime" in
exchange for Dyk.~
promise to pay him a monthly salary of $10,000. Courts,
however, interpret
language to mean that because it is possible- although not
probable-that Dy
might die within a year, an oral contract is enforceable even
though it may no-
completed for several years.

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Sometimes the court's interpretation of what is possible is a bit
far -fetched,
but nevertheless will still stick to the rule that if performance is
possible exactly
within one year, an oral contract is enforceable. Consider the
following
example:
A magazine subscription company promised the senior class of
Redwood
High School, with whom the magazine company has an oral
contract, that
any student who sells $10 million of magazine subscriptions
during the
coming senior class magazine drive (lasting one month) will
earn an all-
expense paid trip to Europe for his or her entire family.
In this example, the relevant question is: Can it happen? The
answer, of
course, is yes! It is possible that a student will sell that many
dollars worth of
magazines in one month simply because some rich relative will
buy them. Is that
likely to happen? Probably not. Because it is possible that the
contract can be ful -
filled, the oral contract would be binding.
Some courts will apply the equitable doctrine of promissory
estoppel (dis-

cussed in Chapter 8) to allow recovery by a person who could
not otherwise en -
force a contract in this situation because of the statute of frauds
requirement.
Answer True (T) or False (F) .
1. In a contract of guaranty, the guarantors promise to pay
is secondary to the debtor's promise. T F
2. Except as provided by statute, oral contracts are just as
enforceable as written contracts. T F
3. The statute of frauds applies only to executory contracts. T F
4. An oral promise to pay your own debt is not enforceable. T F
5 . Martin agreed to work for Simmons for thirteen months.
This agreement would be enforceable if made over the phone. T
F
e Sufficiency of the Written Record
- -
...EARNING OBJECTIVE~
Summarize the essential
information a memorandum
evidencing a written
contract must contain.
randum: informal written
: ce of an agreement required by
_ :atute of frauds
In most states, the written evidence of a prior oral agreement
required by the

statute of frauds is an informal memorandum (record). A formal
written contract
signed by both parties is not necessary but may be used if
desired. It is not neces-
sary that the writing be made at the time of the contract. An oral
agreement is
enforceable even if it is within the statute of frauds as long as
there is some writ-
ing that refers to the agreement and its terms. Some courts have
held that a tape
or video recording may even satisfy the writing requirement.
Generally, the memorandum should contain at least the
following information:
• The names of the parties
• The subject matter of the agreement (real property, a debt,
employment,
etc.)
• The consideration
• All material terms with reasonable certainty
• Only the signature of the party against whom enforcement is
sought
While visiting Stein at her cottage on the lake, Wayne
convinced
Stein to sell the cottage to him. Wayne wrote out a
memorandum of
:~ · s '.::! ·v ·1 ·8 ·1 ·c: ·1 ·~ the agreement, signed it, and sent
it to Stein. Stein did not sign the
suv H!HH:Jms L"LL memorandum. When Stein changed her
mind about selling the cottage,

Wayne brought an action in court to force her to sell. Because
Stein
had not signed the memorandum, there was no valid evidence of
an
agreement. The court would not require her to sell the cottage to
Wayne.
In regard to the sale of real property, a state's statute of frauds
often requ ires
that, in addition to the price, for easy identification the writing
include an accu-
rate and complete description of the piece of real estate to be
sold. The stree:
address alone would be insufficient. Other material terms that
would help clea;-
up any uncertainty includes a clause stating that a title search
would be con-
ducted to ensure the seller currently owns the property (that is,
has clear title
The lesson here is that a contract involving the sale of real
property should in-
volve an attorney who deals in real estate law. This attorney
could add to the cer-
tainty that the legal requirements of the state's statute of frauds
is met .
The signature of the party being held responsible may be
handwritten.
printed, typed, stamped, or may even be in electronic form and
may appear any-
where in the memorandum. An example of an informal
memorandum is show~
in Figure 11.1.
The memorandum may consist of a single document or multiple

pieces of
paper (letters, telegrams, sales slips, invoices, faxes, or e-
mails). If the memo ra n -
dum consists of several documents physically attached, at least
one of them mu
contain the signature of the party who will be held responsible.
The other
unsigned documents in the series must show that their content is
related to t he
signed document.
Phoenix, Arizona
January 17, 2012
AYERS MANUFACTURING COMPANY AND DONOVAN
JENKINS JR. hereby
agree as follows:
AYERS MANUFACTURING COMPANY agrees to hire
DONOVAN JENKINS JR.
as sales manager at a guaranteed salary of $8,000.00 per month
for the duration of the contract. The employment period to
begin February 3, 2012, is to continue for five (5) years,
until February 3, 2017.
FIGURE 11.1 Informal Memorandum
AYERS MANUFACTURING COMPANY
"OW!,~
~~·
=

ctronic Signatures
LEARNING OBJECTIVE~
gnize that a perso n may now
s ign documents
electronically.
rol Evidence Rule
LEARNING OBJECTIVE~
rmine the importance of parol
evide nce as it relates to
contracts.
_ evidence rule: rule stating that
-:: of a written contract cannot
a'lged by prior oral or written
="T'Ie nts
The handwritten signature alone as a way to sign documents has
not been nece s-
sary for some time. Typed or printed signatures are also
allowed, especially in
signing a negotiable instrument (see Chapter 19) . Now comes
the electronic sig-
nature, or e-signature, "invented" to accommodate electronic
commerce. The
e-signature is a generic term that refers to all the methods by
which one can sign
an electronic record. A very common method by which a person
can sign
electronically is the digital signature. It is an electronic
substitute for a manual

signature that serves the same function as a manual signature. A
digital signature
created by a computer signifies an intent to sign. This new
method of signing
documents, especially contracts, has not been without problems,
however. One
problem is whether agreements made in a purely online
environment using e-sig-
natures are legally binding. After all, prior to e-signatures, a
person used a pen
and signed the contract in his or her own unique handwriting.
The question of
legality was not generally questioned because the contract was
most likely signed
in the presence of some official person. Another problem
involves the states.
Most states have laws governing e-signatures; however, these
state laws are not
uniform. Thanks to federal legislation signed into law on
October 1, 2000, the
legality issue has been resolved. The law, known as the
Electronic Signatures in
Global and International Commerce Act (E-SIGN Act), removes
the uncertainty
as to the legality of electronic contracts and different forms of
electronic signa-
tures that have been developed. Such contracts and signatures
are now consid-
ered just as legal and enforceable as traditional paper contracts
that have been
signed in ink. The law states, among other things, that no
contract, record, or
signature may be denied "legal effect" solely because it is in
electronic form
(UCC 2-211 substantiates this law). Documents not covered by
theE -SIGN Act

include prenuptial agreements, court papers, divorce decrees,
wills, evictions,
foreclosures, and health insurance terminations.
There is a downside to using an e-signature: It offers little
security. Your sig-
nature could be intercepted online by thieves and used for
fraudulent purposes.
You are actually placed in the same position as if your credit
card were stolen.
Consequently, you should consider carefully whether you wish
to sign anything
online. Despite these limitations , the E-SIGN Act provides
increased opportuni-
ties for contracting online . Online contracts eliminate time and
costs associated
with exchanging paper documents requiring signatures created
off-line, as when
opening a bank account or obtaining a loan or a mortgage .
Keep in mind that
contracting parties must both agree to use electronic signatures;
otherwise, the
electronic signature is not valid.
Once a contract has been put in writing as the final expression
of agreement
between the parties, it is protected by the parol evidence rule
from a claim by
either party that what is in the contract is not their real
intention. The parol
evidence rule states that the terms of a written contract that is
final cannot be
changed by any oral or written agreements made prior to the
writing. In other
words, neither party can say that he or she agreed to do
something other than

what was included in the written contract. A court will not
allow parol evidence
because the court presumes that the written contract contained
all the terms and
provisions intended by the parties. Any term not included is , by
law, considered
intentionally omitted by the parties. In short, "What you see is
what you get."
Now and Then, a band, entered into a written contract with
Tiffany
Community College to play at the Spring Fling for $1,500.
Shortly before
the contract was signed, the band leader asked the student
activities
director to reimburse the band $500 more for hiring four
persons to
help set up and tear down the band's equipment. The student
activities
director orally agreed to pay this expense. After the Spring
Fling, the
student activities director paid the band leader $1,500 but
refused to
pay the additional $500 for the extra workers. The band sued
the college
to recover the $500. Because the written contract did not
contain a
provision to pay for the setup people, a court will not permit the
band
leader to introduce evidence that the student activities director
orally
agreed to pay this additional sum. The band is bound by the
terms of the

signed, written contract.
Parol evidence may be introduced, however, when the evidence
does no-
change the terms of the written contract. For instance, parol
evidence may be
introduced to explain certain terms or words that are vague or
confusing. Paro
evidence may also be introduced to prove that the written
contract lacked certa ii!
terms originally agreed upon but accidentally left out of or
typed incorrectly in
the written contract. Parol evidence may also be presented to
show that the wr it-
ten contract was illegal, that one party was persuaded to make
the contract b~-
the fraud (deceit) of the other party, or that one person was
menta lly
incompetent.
Campo, on an application for a job as manager of a large store,
lied wher.
he said that he had never been arrested and convicted of a major
crime.
He had actually been arrested, convicted, and sentenced to
prison for
robbery. Campo was hired and signed a three-year contract. Six
months
later, the store owner discovered the lie and fired Campo, who
sued for
breach of contract. The owner could introduce parol evidence to
show
that, because he relied on Campo's statement of having no arrest
record,
he was persuaded through fraud to make the contract with
Campo.

The parol evidence rule applies only to agreements made prior
to or at the
time of signing the written agreement. As a result, oral proof of
any changes w
the writing after the written contract was made can be presented
in court. T he
party presenting the proof, however, must show that the later
agreement con-
tained consideration.
Carlson, a person knowledgeable in electronics, agreed in
writing to
repair your CD system for $200. After beginning work, she
discovered
that more things were wrong than she had previously thought.
Carlsott
informed you that she would not continue the work until you
agreed to
pay her an additional $100. You orally promised to pay, and
Carlson
agreed to continue. When the work was completed, you refused
to pay
the additional $100. Carlson sued in small claims court and
offered
as proof your oral agreement to pay her the $100. This oral
agreement
could legally be introduced in court, but Carlson would still
lose
the case. Carlson, already legally obligated to complete the
repairs
for $200, furnished no consideration for your promise to pay the
additional $100.
The key in determining whether parol evidence will be allowed
is whethe-

the contract put in writing is intended to be the final and
complete agreemea:
between the parties . If it is so intended, then it is considered as
an integrated con-
tract, and any outside evidence will be excluded.
A written contract may be changed by a subsequent oral
agreement if the
written contract was not required to be in writing under the
statute of frauds. ~
the contract being modified must be in writing, the modification
must also be ;_
writing.
~ .----------------------------------c.:» Fill in the blanks to
complete each statement. ..... = c.:» 1. The signature was
invented to accommodate electronic commerce. ..... ..... .....
2. A subsequent oral agreement modifying a written contract
must be in writing if
the written contract originally had to be ____ _
3. For a writing to satisfy the statute of frauds, it need only be
signed by the
rn party against whom it is to be ____ _
N
4. Oral changes to a written agreement made subsequent to the
writing are
• generally unless the written agreement was required to be in
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.... writing under the statute of frauds . .... 5. A contract put in
writing and intended to be the final and complete agreement
between the parties is called a(n) contract.
ey Points in Chapter • • • •
--, contracts are just as legal as written contracts if
ontain offer and acceptance, consideration, compe-
- parties, and legal purpose and if the terms of these
ontracts can be proven in a court of law.
Every state has a law called the statute of frauds,
- .::h requires certain contracts to be in writing to be en-
-.:ea ble. The most common of these are (1) a contract to
-onally pay the debt of another person, (2) a contract
~rsonally pay the debt of a deceased person, (3) a con-
- .:t involving the sale of an interest in real property,
a contract made in consideration of marriage, (5) a
-uact that by its terms cannot be performed within
- year from the date the agreement was formed, and
a contract for the sale of goods for the price of $500
- :nore.
In most states written evidence required by the stat-
-~ o f frauds may be an informal memorandum (record)
- - must contain all the essential terms of the agree-
::nr, including the names of the parties, the sub ject
-aer of the agreement, the consideration, and any ma-
.al terms. It must be signed at least by the party who

..J be held responsible (party being sued). The signa-
-e of this person may be handwritten, printed, typed,
portant Legal Terms
-~morandum parol evidence rule
stamped, or signed electronically if all parties agree to
use e-signatures.
The parol evidence rule states that when a contract
has been reduced to a writing as the final statement of
agreement between the parties, it cannot be changed by
any oral or written agreement made prior to the writing.
Parol evidence may be introduced, however, to explain
certain terms or words that are vague or confusing, or to
prove that the written contract lacked certain terms orig-
inally agreed upon but accidentally left out of or typed
incorrectly in the written contract. Parol evidence may
also be presented to show that the written contract was
illegal, that fraud was involved, or that one person was
mentally incompetent.
Oral proof of any changes to the writing after the
written contrac t was made can be presented in court if
the party presenting the proof shows that the later agree-
ment contained consideration.
A written contract may be changed by a subsequent
oral agreement if the written contract was not required
to be in writing und er the state's statute of frauds. If the
contract being modified must be in writing, the modifi-
cation must also be in writing.
----- -------------

prenuptial agreement statute of frauds
estions and Problems for Discussion --------------------------------
------------
As you read through the chapter, what are four key
points that were made about the statute of frauds?
- Does putting a contract in writing guarantee that
its terms will not be que stioned by the parties at the
ri me of performance?
- Under what circumstances will the courts not allow
parol evidence to be introduced in a lawsuit relating
ro the terms of a written contract?
4 . Thompson, the owner of a successful floral shop,
orally promised Franks, an experienced floral
arranger, a bonus of $10,000 and a monthly salary
if Franks would work for Thompson for two years.
T he bonus was to be paid at the end of the two-year
period. Franks actually did work for the full term
of the oral agreement. Will the statute of frauds
prevent Franks from collecting the bonus?
5. The Roc Co. entered into an oral contract to pay
Willis and Associates, a certified public accounting
firm, $35,000 to perform a complete audit of its
accounting records. The report was to cover a
period of ten months but due fourteen months from
now. Willis agreed orally to perform the audit and
to begin within three months. Regardless of the
delay in beginning the audit, Willis agreed to meet
the fourteen-month deadline for completion. Does
the contract fall within the statute of frauds?

6. Madan's son was arrested for driving while
intoxicated and had to hire an attorney to defend
him in court. The attorney requested to be paid
$1,500, one-half in advance and the remainder at
the conclusion of the court hearing. Because the son
did not have the funds, Madan, in the presence of
several other attorneys in the law office, told his
son's attorney that he would pay the fee out of his
own pocket following the court hearing. Because
Madan was a well-to-do businessperson in the
community, the attorney agreed to these terms.
Following the court hearing in which the son was
convicted, Madan refused to pay as agreed,
claiming that the attorney had done a poor job
representing his son. The attorney sued, but Madan
defended, claiming that his agreement to pay was
not legally binding on him because it was made
orally. Can the attorney collect her fee?
7. Moralle orally promised Hanson that if she agreed
to marry him, he would give her a large monthly
expense account, a new car every two years, and a
vacation trip each year to a destination of her
choice. Hanson accepted, and they were married.
Moralle, however, did not keep his promises.
Hanson sued Moralle on his promises. Will she
succeed in this suit?
Cases for Review
1. A landlord entered into a lease (contract) with a
tenant. A clause in the lease stated that the tenant
would use the premises only for a gasoline station,
car wash, and related activities. The landlord sued
to terminate the lease, claiming that the tenant had

violated an oral agreement, which was made at the
time the lease was drawn up, not to add a
convenience store to the gas station. Was this oral
agreement binding on the tenant? (Snow v. Win,
607 P.2d 678)
2 . Whitman Heffernan Rhein & Co., a financial
advisory company, sued the Griffin Company to
recover compensation for services rendered in
negotiating the purchase of a business (Resorts
International) from Donald Trump. The agreement
between Whitman and Griffin had been made
orally, but it should have been in writing under the
New York statute of frauds. The trial court decided
8. Lisi, vice president of the National Football
Association, made arrangements to hold the
association's annual convention at the Marvel Hotel
and Convention Center. He met with Brock, the
hotel manager, one year before the scheduled event.
They orally came to terms on several important
points, including room rates, meal prices, and
exhibit space charges. Brock was then replaced by a
new manager, Talbot. Lisi met with Talbot to
review the oral agreement he had made with Brock,
intending to draw up a written contract to cover
these points. Talbot had no record of this agreement
and refused to honor any prior arrangements,
claiming instead that because of inflation, prices
should be raised 20 percent. Can Lisi legally require
Talbot to abide by the original oral agreement he
had with Brock?
9. McLean orally agreed to manage several of Orcini
aerobics studios in Los Angeles for three years at a
salary of $35,000 a year. After six months, McLea n

decided to quit her job and move to the East Coast.
Orcini had to hire a new manager at a salary of
$38,000 a year. Orcini claimed that McLean was
liable for damages of $3,000 a year for breach of
contract until McLean's original contract expired.
Is Orcini correct in his claim?
10. Bain lived in Bristol Harbor, a resort area along the
Atlantic coast. She entered into a written agreement
to sell her daily catch of fresh lobster at an agreed
price to a local restaurant owner during the tourist
season. At the end of the tourist season, Bain sued
the restaurant owner for an additional $2,000. At
the trial, she claimed that shortly before signing the
contract, the restaurant owner orally agreed to pay
her a $2,000 bonus. Can Bain introduce the oral
agreement as evidence and collect the $2,000 bonus:
for Griffin, but Whitman appealed. Should the
appeals court decide for Whitman? (Whitman
Heffernan Rhein & Co., Inc. v. The Griffin Co. ,
557 N.Y.S.2d 342)
3. Jones (appellee) signed a printed contract form
agreeing to purchase a house from Long. Long alsc
signed the form. At the time of signing, Jones also
made a down payment as evidence of her good fai---
to go through with the contract. The down
payment was to be applied to the purchase price
upon completion of the sale of the house. Jones
later refused to go through with the contract and
ended up suing Long for the return of the down
payment. At trial, Jones introduced parol evidence
that an understanding existed between Long's ager:
and her that she could not buy the house unless sh;:
sold her house first, and that her house was not

sold . Jones won her case at the trial level. Long
.ippealed on the grounds that it was improper for
~e trial court judge to rule for Jones based on the
a rol evidence rule regarding the agreement
be tween Long's agent and Jones. Long claims that
-he contract for the sale of the house had been
:educed to writing as the final and complete
agreement and parol evidence could not be
~troduced to alter that agreement in any way. How
would you rule in this case? (Court of Appeals of
T" entucky, 319 S.W.2d 292)
- Bratman, an attorney, had a client who w as injured
.n an automobile accident and was being treated by
::) r. Healy. Bratman orally promised to pay Healy
his medical fees out of the proceeds of any award
made to his client as the result of a lawsuit based on
•he accident if the client did not pay the fees. When
-he client was awarded $15 ,000 for his injuries,
L. l
Bratman refused to pay H ealy, invoking the statute
of frauds . Can Healy legally hold Bratman liable for
his oral promise to pay? (Healy v. Bratman, 409
N .Y.S.2d 72)
5. Malo, an architect, signed a contract with Gilman
to design an office building. Nothing was said in
the contract about the size, style, or maximum cost
of the building, only an estimated cost. When the
bids for the building came in, they were so much

more than the estimated cost that Gilman decided
not to build the building. He also refused to pay
Malo for his services. In court, Gilman tried to
introduce evidence that there had been
conversations about maximum costs. Malo claimed
that this was not possible under the parol evidence
rule. Is Malo correct? (Malo v. Gilman, Ind. 379
N.E .2d 554)
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Business Law
Principles and Practices
Goldman, A. , & Sigismond, W. (2014). Business Law:
Principles and Practices (9th ed.). South-
Western Cengage Learning.
Cengage Advantage
Books

PRINCIPLES AND PRACTICES
egality
CHAPTER PREVIEW
Th e Nature and General Effect of
!legal Contracts
Exceptions to Effect of Illegality
~ypes of Illegal Contracts
Contracts Forbidden by State
Statutes
Co ntracts to Commit a Crime or a Tort
Contracts That Violate Licensing Statutes
Contracts That Violate Gambling Statutes
Contracts That Violate Usury Statutes
~ontracts That Violate Sunday Statutes
... ontracts That Oppose Public Policy
~ontracts That Disclaim Liability for
Negligence
~ontracts That Interfere with the
Administration of Justice
::=ontracts That Interfere with the
Performance of a Public Duty
~on tracts That Harm Family Life
- ntracts in Restraint of Trade

ontracts That Create a Monopoly or Limit
Competition
ontracts That Are Unconscionable
artially Illegal. Contracts
CHAPTER
HIGHLIGHTS . . .
~ Suppose
'
1
~You're the
--~DOGE
This chapter examines the last requirement of a valid contract:
legality.
Initially, the chapter discusses the nature and general effect of
illegal
contracts, the circumstances under which agreements are
deemed illegal, a"
the exceptions to the rule that courts will not enforce illegal
agreements. The
remainder of the chapter lists and describes the agreements that
are genera~
recognized as being illegal in most states. The final section
points out the

effect of an agreement that is partially legal and partially
illegal.
Facts
Jennings and her two children, Matthew, age 11 and Benjamin,
age 17, leased
an apartment in a subsidized housing complex with very strict
rules. Strict rules
were required because the rent was low and the amount paid
was predicated on
the number of people occupying the apartment. The stipulations
in the lease al-
lowed Jennings to remain in the complex but only under these
conditions: (1) that
only she and her two children could live in the apartment; (2)
that the landlord
must be immediately notified if one or both of the children
move out; (3) that she
was responsible for the actions of all members of the household,
including any
criminal activity involving any member of the household.
Benjamin was arrested
and convicted of robbery at a local grocery store. The incident
was reported in
the local newspaper. The landlord gave Jennings thirty days
notice to vacate the
apartment because of a lease violation. She refused to move so
the landlord had
her evicted . Jennings sued to have her lease reinstated.
At Trial
Jennings introduced evidence that Benjamin had moved away
from the apart-
ment complex three months before the robbery occurred . Based
on the testi-

mony of two persons in neighboring apartments, the landlord
offered evidence
that Benjamin had been to the mother's apartment and stayed
overnight for two
evenings pri or to the time that the robbery was committed. The
trial court ruled
that because Benjamin had stayed in the apartment for the two
evenings prior to
the robbery, he was considered a member of the household and
that Jennings
therefore had violated the conditions of the lease. The court
further ruled that
Jennings had to move from the premises . Jennings appealed the
case. She con-
tended that the contents of the lease were unconscionable .
Questions
1. Define the term unconscionable, in terms of a lease.
2. Are the terms of Jennings lease unconscionable? Explain why
or why not.
The Nature and General Effect of Illegal Contracts - - - --------
LEARNING OBJECTIVE~
Indicate the status of illegal
contracts-those that are
completely illegal; those
containing only illegal
clauses.
T he fourth and last requirement of a va lid contract is that it
must be made for a le-
gal purpose. As discussed in Chapters 7 through 9, to rise to the
level of a contract,
an agreement must cont ain an offer and an acceptance, both par

ties must receive
consideration, and both par ties must be competent. Even if
these requirements are
fulfilled, however, the agreement will still not be recognized as
a contract in a court
of law if the purpose of the agreement is illega l. The general
rule is that illegal con-
tracts are void (never existed) and thus unenforceable. T he cour
ts in this case leave
the parties to such agreements where they are in the bargaining
process .
Some agreements, such as agreement s t o commit crimes, are
entirely illegal;
others contain only clauses that are illega l. In the event of a
lawsuit, a cour t will
simply refuse to hear a case involving an illegal agreement if
both parties know
pari delicto: persons equally at
~'"'I or equally guilty
the agreement is illegal; in such a case, both parties are in pari
delicto (equally at
fault). Neither party can successfully sue the other to seek
enforcement of rhe
agreement, to recover for breach of contract, to regain any
consideration giYen,
or for unjust enrichment. The court will sometimes hear a case
involving an
agreement that contains one or more illegal clauses if the
agreement is legal in ev-
ery other respect. If the court hears the case, it will simply not
enforce the illegal

clauses.
An agreement (or a clause in an agreement) is illegal if its
purpose, or the
manner in which it is carried out, is forbidden by state statute or
opposed to a
state's public policy. Courts in each state have their own
interpretation of the
term public policy-what is right and wrong. Generally, however,
agreements
opposed to public policy contain terms that are immoral or
unethical or that in-
terfere with the health, safety, or general welfare of the public.
Courts have been
willing to enforce such agreements even though they have not
been expressly
declared illegal. Public policy, like the common law in the
United States, cannot
remain static, but must change with the evolution of public
opinion, morality,
and legislative polices. Our law would fail if it did not reflect a
society's chang-
ing values over time.
.
Exceptions to Effect of Illegality
Despite the general rule that an illegal contract is void and
unenforceable and
that the court leaves the parties where they were in the
bargaining process, there
are exceptions to the rule that courts will not enforce illegal
agreements. These
exceptions are intended to prevent the injustice that can result
from a rigid appli-
cation of the general rule. One exception occurs when the two
parties are not

equally at fault (not in pari delicto). A court may rule in favor
of the more inno-
cent party if recovery serves the public interest in some way.
For example, when
one individual unknowingly deals with a person who is not
licensed as required by
state law, a court will permit the innocent party to recover any
money paid to the
unlicensed person for services performed. The focus here is on
the conduct of the
less guilty party rather than on the illegality of the subject
matter of the contract,
which is considered incidental to the bargain. Another ex
ception is ignorance of
the facts as to the illegality of an agreement. Although the
courts will not enforce
such an agreement, they will allow a person who has fully
performed his or her
part of the agreement unaware of the illegality to recover any
fees due. If, for ex-
ample, you were hired by a manufacturer to transport illegal
merchandise from
California to New York, you could still collect your fee as long
as you were not
aware that you were transporting illegal merchandise. Still
another exception re-
lates to gambling. Statutes in some states permit a person who
suffers gambling
losses over a certain amount at such forms of gambling as cards
and dice to re-
cover these losses from the winner. These statutes apply only to
gambling that is
held at places other than legalized gambling casinos. Under
such a statute, for
example, a person may recover losses over a certain amount that
occurred at a

"friendly" poker game at a house party. The purpose of these
statutes is not to
protect those who lose money. Their purpose is to discourage
gambling by put-
ting people on notice that they may have to return their
winnings to the loser.
Types of Illegal Contracts
There are two reasons a contract may be illegal: if the contract
is in violation of
state statutes or if the contract is opposed to public policy.
Contracts that are ex-
pressly or impliedly forbidden by statute or by public policy are
generally unen-
forceable, even if both parties are ignorant of the facts
constituting the illegality
and did not intend to break the law. The illegal agreements
discussed in this
chapter are generally recognized as illegal in most states. Keep
in mind that while
illegal contracts have civil penalties, one or both parties may
also be subject to
criminal penalties if the act to be performed according to the
agreement is
a cnme.
' I
; . II
- --- -- -- --- "
Contracts Forbidden by State Statutes

State those illegal contracts
forbidden by state statute.
licensing statute: law req uiring
pe rsons to be licensed to practice
their occ upation
First we discuss agreements that violate state statutes. State
legislatures have passe,
laws declaring certain types of agreements illegal and void
because they cannot be
performed without violating the state's civil and criminal
statutes, licensing stat-
utes, gambling statutes, usury statutes, or Sunday statutes. Keep
in mind that a
contract or a clause in a contract may be illegal even though
there is no specifi
state statute prohibiting what is to be performed under the terms
of the contract.
Contracts to Commit a Crime or a Tort
Agreements are illegal if they require one party to commit a tort
or a crime. Th i
is the most obvious category of illegal contracts. Examples of
common torts are
assault and battery, slander, libel, fraud, and the infliction of
emotional distre s
on another. Arson, murder, burglary, bribery, larceny, robbery,
selling illegal
drugs, and buying stolen property are examples of acts that are
considered
crimes. Agreements to commit any one of these torts or crimes
could not be en-
forced by either party. They would be absolutely void. To allow
people to go to

court to obtain enforcement of these types of agreements, which
are so obvious ly
contrary to law, would be ridiculous.
Johnson entered into an agreement to sell illegal drugs to
Morgan for
$1,500. The court most likely would rule this agreement to be
void and
unenforceable.
In this example, even if Morgan paid the $1,500 in advance, a
lawsuit to get
the money back will most likely not be successful because the
transaction wa s
illegal (selling illegal drugs) in the first place.
Agreements to protect one party from the consequences of his or
her tort or
crime are also illegal.
The mayor induced one of her campaign workers to break into
the home
of an opponent in the upcoming election and to remove papers
that would
be helpful in the mayor's reelection campaign. The mayor
agreed to pay
the worker a large sum of money and to protect the campaign
worker
from criminal charges if caught. The agreement was illegal. The
mayor
and the campaign worker were both criminally liable for their
illegal acts.
Contracts That Violate Licensing Statutes
All states have licensing statutes, laws that require some
individuals to have ali-

cense or permit to practice their occupations. These laws are
designed to protect
people from dealing with unqualified individuals. In most
states, doctors, den-
tists, nurses, lawyers, pharmacists, public accountants,
surveyors, architects ,
real estate brokers, insurance agents, funeral directors, barbers,
veterinarians ,.
beauticians, electricians, plumbers, and contractors must be
licensed. When state
statutes require a person to have a license to perform services
for the general pub-
lic, an agreement made with an unlicensed person is illegal. The
person perform-
ing the unlicensed act has also committed a crime, as for
example when a
pharmacist whose license was suspended (unknown to the owner
of the pharmacy)
dispensed prescription medication to Medicaid recipients
amounting to $91,000
for several months following the suspension. In this case, the
money obtained
was illegal and the act of dispensing the medication was
criminal.
Because the agreement is illegal, an unlicensed person cannot
legally collect for
the services performed. In some states, a person who performs
services without the
required license is guilty of a crime punishable by a fine,
imprisonment, or both.
Weinstein completed graduate school and graduated with a
degree
in veterinary medicine. He had not, however, passed the state
boards

qualifying him for a license to treat animals. When a family,
aware that
ing: legal form of playing for
- es, such as in a lottery
-.b ling: illegal agreement in which
-: ::>a rty wins and another loses
= y by chance
Weinstein had graduated as a vet but unaware that he had not
passed
the state boards, asked him to treat their family dog for a
serious hip
problem, he did so and then sent them a bill. Later, the family
discovered
that he was not yet licensed and refused to pay. Because
Weinstein was
practicing veterinary medicine illegally (without a license), he
could not
collect the fee for his services. Weinstein may also be
criminally liable for
practicing medicine without a license.
If a person unknowingly deals with an unlicensed individual,
the courts will
allow that person to recover any money paid.
Some licensing statutes are merely intended to obtain revenue
for the state or
local government. Any person paying the fee can obtain a
license without show-
ing competence in a particular trade or profession. Because the
purpose of such

revenue-raising licensing statutes is not the protection of the
public, agreements
made with unlicensed persons are legally binding. The
unlicensed person, how-
ever, is still subject to a criminal penalty for violating the
licensing statute. In
assessing the penalty, courts will take into consideration such
factors as harm
resulting from failure to obtain the license and the extent of
knowledge of the
persons involved.
For $250, Arden hired Gammons, an auctioneer, to sell Arden's
household
goods at a public auction. The state's only requirement for an
auctioneer's
license, which Gammons did not obtain, was the payment of a
$100 fee.
After the auction, Arden learned that Gammons was not licensed
and, as
a result, refused to pay Gammons the $250. Because the statute
was for
revenue purposes only, Arden must pay Gammons the $250.
Gammons,
however, is guilty of violating the licensing law and may face
action from
the state.
Contracts That Violate Gambling Statutes
Gaming in the United States has undergone a great boom, from
Native American
casinos and other regulated commercial casinos, to gaming
online (Internet gam-
ing). Each state is free to regulate or prohibit it. If you count
state-run lotteries,
almost every state allows some form of gaming. At this point we

should distin-
guish between gaming and gambling. Both refer to agreements
in which one
party wins and another party loses purely by chance, even
though skill (in most
cases) is involved. Gaming, h owever is an activity that has
been legalized, and
consequently, those who participate are not subject to criminal
prosecution, even
if they make a profit while engaged in the activity. Gambling,
on the other hand,
is an illegal activity simply because the law does not sanction
it. For example, go -
ing to a casino and winning money is legal and would be
considered gaming;
however, organizing a poker game at your home and arranging
to make a profit
for yourself on each hand would be considered gambling. A
simple poker game
in which all players are on an equal footing (no one earns
anything from the
game other than as a mere player) would be gaming as long as
social games are
allowed in the state where the game takes place. It would be
referred to as recre -
ational gambling. Some states do not allow recreational
gambling and may even
consider participation in such an activity a misdemeanor. States
that do allow
recreational gambling may place a limit on what a player may
win or lose. Bingo
is considered gaming, but it could become gambling if a bingo
party is arranged
without getting a license in states where a license is required.
Legal gaming activities in many states include state lotteries;

casino betting;
pari-mutuel betting on horses at race tracks; bingo games;
Monte Carlo nights;
raffles conducted by charitable, religious, and educational
organizations; slot ma-
chines; keno; video blackjack machines; and video poker games.
The most popu-
lar forms of illegal games are "numbers," which is actually a
lottery, and betting
with bookies, typically sports bet ting (e.g., a football pool or a
bet on a prizefight).
recreational gambler: one who
gambles for pleasure
professional gambler: one who
gambles as a profession or business
RYou t eac
There are also homespun illegal games such as playing cards for
money in your
own home or at club meetings . Games such as those used by
stores for promo-
tional purposes are legal as long as they do not require
participants to buy some
article or ticket. States look at gaming in economic terms. In
return for legalizinc
certain forms of gaming, a state collects a percentage of the
gaming profits.
Internet (online) gambling that originates primarily from
offshore sites is a
huge business. All a person has to do to commence gambling is

to open ar:.
account, deposit funds in this account, and start betting. These
offshore sites.
however, compete with state lotteries (which are legal) for
business. The Justice
Department at first said that online gambling is illegal under the
Federal W ire
Act of 1961. They then modified their stand. It now states that
it is against fe d-
eral law to take sports, casino, and poker bets, but not illegal to
place those bets.
While authorities have not pursued individuaL bettors pLaying
poker on their
home or office computer, they have gone after some gaming
executives. Online
gaming companies, however, maintain that U.S. laws don't
apply to them be-
cause they are located in places where online gaming is legal,
such as Engla nd.
Costa Rica, and Gibraltar. They claim that the United States
would be reachin
beyond its legal authority to prosecute someone in another
country. However, a
U.S. Attorney promised to go after those individuals who
disregard federal an
state laws . The Unlawful Internet Gambling Act, passed in
2006, strengthens t he
Federal Wire Act. This bill places significant impediments on
the operations o:
fly-by-night offshore Internet gambling companies. The act
makes it more di ffi-
cult to place bets online by restricting (actually outlawing)
certain financ i<L
transactions. In fact, it is against federal law for banks to
handle online gambl inc
transactions (e .g., players making deposits or withdrawals into

or from an onl ine
casino) . The legality of the online gaming industry is
questionable and confusing.
While legislation has tried to clear the air and send a message to
operators an
players alike, the ability of the U.S. government to regulate
transactions in cyber-
space is limited. With the popularity of the online offshore
accounts, the politi-
cal cost of enforcement is high.
Those who gamble illegally may be classified as recreational or
professio na..
gamblers. Recreational gamblers participate in a gaming event
socially and fo:-
pleasure. Professional gamblers engage in gambling activities as
a business o:-
profession, hoping to make a profit. Their involvement with
gaming is generall:
considered a crime. Recreational gamblers are not ordinarily
subject to a cri mi-
nal penalty (police seldom bother them) , but they may not
generally enforce t hei:
gambling agreements in court; as gamblers, they are performing
an illegal act.
Martin and Spicer lived in a state in which recreational gaming
was
illegal but not criminally wrong. They made a $100 bet on a
heavyweight
boxing match. When Martin won the bet, Spicer refused to pay
the
$100. Because the bet was illegal, Martin could not collect from
Spicer
even if Martin decided to sue in small claims court. Because
they were

recreational gamblers, neither party was criminally liable.
Rissone received a letter from a magazine publisher inv iting
her to enter the com pa-
ny's $10,000,000 sweepstakes promotion by simply returning a
book of certificates
with her name already typed on them. In the same envelope was
an invitation to b
one of the company's new books, Eat Better, Live Better, at a
reduced price. She di~
not have to buy the book in order to enter the sweepstakes,
however. Riss on:o
returned the certificates, but she did not win anything . She was
so irritated that s hE
notified the company that they were carrying on an illegal
gambling activity.
Questions
1. Was the magazine publisher carrying on an illegal gambling
activity? Explain
your answer.
2 . Are giveaways used for promotional purposes lawful?
Explain.
: fee paid by borrower to
:-'or the use of money; also,
ght to use of or claim on real
. charging a higher rate of
:=s· than allowed by law
Contracts That Violate Usury Statutes

Many states have laws that limit the interest a lender can
charge. Interest is t he
compensation or fee that a borrower pays to a lender for the use
of money. If t he
interest rate charged by the lender exceeds the legal rate
allowed by state law,
t he lender has committed usury. Interest rates are simple, not
compound, interest
unless otherwise stated. Usurious agreements are illegal. You
might also say the
usury is a complicated area of law and sometimes confusing
because many types
of loans are exempt from the usury laws of a particular state and
each state han-
d les the legal ramifications of the law differently. To determine
what interest
rates are considered usurious and the pena lties imposed, you
would need to visit
each state's usury law statute books or contact the state agency
that regulates
banking and commerce.
Madison wished to buy a used car to drive to a local college
where she
was enrolled and to her part-time job. She did not have good
credit, so
banks in the community where she lived turned her down for a
car loan.
She saw an ad in the local paper in which an individual was
offering
to sell a used older-model car for $5,000. When Madison
contacted
this individual, this individual was willing to sell her the car but
would
charge interest at the rate of 20 percent per year until the car
loan was

paid off. If you lived in a state where 14 percent was the
maximum
allowed by statute, Madison's agreement with the lender would
generally
be considered illegal.
Usury laws were passed to protect certain borrowers from
paying excessively
high interest rates. Since the loan to Madison would be
considered usurious and
the lender was an individual and not a bank or a finance
company, she could file
a complaint in the small claims court in her town, village, or
city and present
legal proof th at the rate of interest for the loan was above that
allowed by the
statute in her state. She would most likely win her case. The
civil penalty for
usury varies among states. In many states, the lender will be
denied the right to
collect any interest. In some states, the lender forfeits the
excess interest received
over the rate allowed. In a few states, the court is given
permission by statute to
set t he amount of damages, which could end up being double
the usurious rate.
A person familiar with the usury law of his or her state might
say, "I am pay-
ing much more than that (referring to the usury law of her state)
on my car loan at
my bank ." T hat is correct! Banks, licensed pawnbrokers, credit
unions, and
finance companies have separate r ules thanks to a series of
Supreme Court deci-
sions which changed things to facilitate business deals. If the

usury rate in a par-
tic ular state is 24 percent, a bank or small loan company in that
state may legally
be charging 30 percent or more. Or, a so-called payday loan or
tax refund loan
may have a lega l rate over 300 percent. National banks, as the
result of the Supreme
Court ruling in Marquette National Bank v. First of Omaha
Corp., are able to
charge their customers (no matter where the customers are
located) the rate of the
state in which the bank has its main offices. In this Supreme
Court case, even
t hough t he customers in Marquette lived in Minnesota, the fact
that the bank had
its main offices in Nebraska allowed it to charge its Minnesota
customers the
higher Nebraska interest rate. Following the passage of this law,
a deluge of
national banks moved their main offices to states that either
repealed their usury
stat utes or had no interest rate cap. The result is that outer
space has become the
limit for consumer loan rates. It has been stated that some of the
rates being
charged by lending institutions may embarrass loan sharks.
Usury stat utes apply only to loans of money, not to sales of
merchandise on
credit, even if the seller charges a higher interest rate than is
permitted. Although
credit sa les are not governed by state usury laws, they are
regulated by other state
stat ute s and by the federal Truth in Lend ing Law. Usury laws
and the Truth in
Lending Law will be further discussed in Chapter 35.

Sunday laws: laws governing types
of transactions that can be performed
on Sunday
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Contracts That Violate Sunday Statutes
Sunday laws, or blue laws as they are sometimes called, govern
the types of tra n:.-
actions that can be performed on Sundays. People's attitudes
have changed si nce
Sunday laws were first passed during the colonial period. As a
result, laws re-
stricting business and other activities on Sundays have been
changed by modify-
ing state statutes, by passing local ordinances, or by court
decisions. Most states
have either repealed or modified their Sunday statutes. Sunday
laws that rem ain.
are often not enforced with the exception of those related to the
sale of alcoholi-
beverages. In the few remaining states that have such statutes,
the types of con-
tracts that are illegal vary from state to state. The most common
statute decla res
an agreement illegal and void if it is made on a Sunday or is to
be performed on
a Sunday. A court will not aid either party if there is a violation

of a Sunday law.
Some courts hold that parties to an agreement made on a Sunday
may ratify
it on a regular business day. Complete performance by both
parties or partia:
performance by one party also acts as a ratification of the
agreement. After rati-
fication, the courts consider the agreement remade on the
weekday and enforce
it as such.
In most states, repayment of money due on a Sunday or legal
holiday can be
postponed until the first business day after the Sunday or
holiday.
Murphy, who borrowed $250 from McGrath, agreed to repay the
loan in
sixty days. The due date of the loan fell on a Sunday. Murphy
would not
be obligated to repay the loan until Monday, the next business
day.
Sunday laws do not apply to agreements made to protect life,
health, or prop-
erty or made on behalf of religious or charitable organizations.
In some states.
Sunday laws do not apply to persons who observe the Sabbath
on some other day.
Answer True (T) or False (F).
1. To say that an illegal contract is void means that by
law the contract never existed. T F
2 . If both parties to an illegal agreement are in pari delicto,

neither party can successfully sue the other to seek
enforcement of the agreement. T F
3. While illegal contracts have civil penalties, the parties
involved may also be subject to criminal penalties. T F
4. Charging interest in excess of the legal rate is
considered usury. T F
5. An agreement to rob a bank is an example of a
void contract. T F
Contracts That Oppose Public Policy -
State those illegal contracts
opposed to public policy.
.L ·s '.L ·v '.L ·,; '.L ·;:: '.L .,
Sd8MSUII H:HH:J:Il~S L"Ol
An agreement, or a clause in an agreement, opposed to public
policy may be ille-
gal even though there is no specific state statute prohibiting its
performance un-
der the terms of the agreement. Such agreements are considered
illegal and void
in most states, however, because they are opposed to public
policy and wou ld
negatively impact society. While public policy may be viewed
as a catchall, i-
most often applies to contracts that are injurious to peace,
health, good order, or
established morals of society (a public sense of what is right
and wrong). It ha

been said that the law fails if it does not reflect a society's
changing social and
moral values. It must change with the evolution of public
opinion, morality, and
legislative policies. Agreements in this category include those
that disclaim liabil -
ity for negligence, interfere with the administration of justice,
interfere with t he
atory clause: contract clause
: '1g a party from liability for
=ence
ct of adhesion: contract
~ ing clauses with unfavorable
~ su pporting a party seen as
g a superior bargaining pos ition
performance of a public duty, harm family life, unreasonably
restrain competi-
tion and trade, create a monopoly or limit competition, or are
unconscionable.
Contracts That Disclaim Liability for Negligence
Businesspeople and others often place exculpatory clauses in
agreements, excus-
ing themselves in advance (or at least limiting their liability}
from any payment
for injury or damages caused by their acts. An exculpatory
clause is viewed with
disfavor by the courts because it may enable a person to escape
paying damages
for wrongful conduct. Courts tend to judge the legality of such

clauses on a case-
by-case basis. An exculpatory clause is generally held to be
contrary to public
policy and therefore void and unenforceable against an injured
party. Although
recognizing the importance of freedom of contract, the courts
also wish to pro-
tect members of the general public who are not always alert to
the consequences
of signing a contract containing a clause that relieves business-
people from liabil-
ity. Such clauses are especially likely to be held unenforceable
if one party is re -
quired to sign the agreement on a take -it-or-leave-it basis
because the other party
is in a superior bargaining position. A contract written
exclusively by one party
considered to be in a superior bargaining position and
containing unfavorable
clauses is called a contract of adhesion. Examples of those in
superior bargaining
position include apartment owners, banks, leasing companies,
and car dealers.
The Randy White automobile dealership agrees to repair the
transmission
of a car brought into the dealership by Seager, one of its regular
customers. The dealership, however, placed a clause on the
work order
(contract) in fine print that the dealer "will not be liable for any
mistakes
it may make during the repairs." This clause is unenforceable,
especially
because the dealership is in a superior bargaining position.
However, it
will be liable if, because of negligence on the part of the

mechanic doing
the repairs, the transmission is not properly repaired.
Karen leased an apartment from Todd in a rundown
neighborhood.
Shortly after signing the lease and moving in, Karen fell down a
flight
of stairs in an unlit stairwell when an unrepaired step collapsed.
She
was severely injured. When Karen brought a suit for injuries
suffered,
Todd's lawyer introduced into evidence a clause in fine print in
Karen's
lease that stated: "The tenant agrees to hold the owner of the
premises
harmless from any claims for injuries no matter how caused."
Despite
this clause, Todd is still liable because the exculpatory clause in
the lease
is unenforceable: It is a violation of public policy.
Not all exculpatory clauses are aga inst public policy. This is
especially true
when the party seeking enforcement is not considered to be in a
superior bar-
gaining position because of the nature of the service it provides.
Health clubs and
amusement parks are good examples of businesses in this
category. They often
use exculpatory clauses to limit their liability for injuries to
those who accept
their services. Even so, the clauses inserted in any agreement
cannot be too
broad.
When Benz became a member of the Supercare Health Spa, he

was
required to complete and sign an application that included a
release, on
which was written in bold print, "relieving the spa owners and
operators
from all risks of injury that a member suffers while
participating in club
activities." One evening, as Benz was leaving the shower at the
spa, he
slipped on the wet tile floor, fell, and was injured. It was
determined that
the injury resulted from the spa's negligence in maintaining the
shower
room. The spa claimed that regardless of this fact, the release
form that
Benz signed relieved the owners from liability. The spa would
probably
lose this case.
lobbying: trying to influence
lawmakers to vote for or against
legislation
In this example, a court would probably rule that the
exculpatory clause con-
tained in the application was against public policy and void.
The clause as written
was too broad : It relieved the club of liability for all injuries
sustained by a mem-
ber while participating in club activities (i.e., regardless of how
the injury
occurred). If the spa wished to include in its application a
clause that could be up-
held in court (and that would therefore be binding on those who

signed), the clause
should have been worded so that the spa was relieved of
liability for negligence
only (negligence of spa employees or negligence in maintaining
spa equipment).
Wording that narrowed the grounds for relieving the spa of
liability would have
increased the chances of the court's ruling in favor of the spa if
a lawsuit arose.
Exculpatory clauses that relieve a party from liability for injury
or damage
beyond its control will usually be upheld in court.
In most cases, courts will not enforce exculpatory clauses that
attempt tore-
lieve a contracting party from his or her own criminal conduct,
from intentional
injury or damages, or from gross negligence. To uphold such
clauses would place
the rights and safety of the party or parties signing such
agreements in jeopardy.
In some states, exculpatory clauses in certain types of contracts,
such a
leases, have been declared illegal by statute.
Contracts That Interfere with the Administration of Justice
Agreements that tend to interfere with the proper administration
of justice-thar
prevent the law from being applied fairly- are illegal. Examples
of agreement
that tend to obstruct justice include an agreement to pay a
witness to give fal se
testimony or to conceal evidence during a court trial, an
agreement to pay a ju-

ror to vote a certain way in a trial, and an agreement not to
prosecute a person
who has committed a crime in return for a sum of money.
Russ was the receiver of taxes for the town of Millan. Because
she was
heavily in debt due to gambling, she embezzled $5,000 from the
tax
fund to pay off her debt through an accounting manipulation of
the
tax records. The town supervisor discovered what Russ had
done and
promised not to report the matter to the police if she agreed to
pay him
$1,000. Russ agreed but then changed her mind and refused to
pay this
money to the supervisor. The supervisor could not enforce this
illegal
agreement in a court of law.
Furthermore, because these agreements may a lso require the
commission of
a crime, the parties may be subject to criminal penalties.
Contracts That Interfere with the Performance of a Public
Duty
People have the right to expect that elected and appointed
officials will perform
their duties properly and honestly. Agreements that tend to
prevent the proper
performance of duties by public officials are opposed to public
policy and therefofl
illegal. An agreement to bribe a judge, a police officer, or the
district attorney iL
return for a favor is illegal. Likewise, an agreement is illegal if
a public officia:

agrees to accept money for performing a legal duty, for
promising not to perform
a legal duty, or for promising to use personal influence to affect
the passage of a
law.
Lobbying is the practice of trying to influence the members of a
legislatin:
body to pass or defeat certain bills. As a rule, lobbying is not
illegal. You ca;:;
make an agreement to pay an attorney or an expert in a
particular field to presec.:
your case to the lawmaker, leaving it up to the lawmaker to
decide on the is sue_
An agreement to influence a legislator's decision by using
bribery, threats , a.-
other improper means, however, is illegal.
An influential state senator agreed to accept $10,000 from
Taber in
return for influencing other legislators to pass a law permitting
a certain
nant: a promise not to compete
expensive drug to be removed from the prescription list and
made an
over-the-counter drug. The senator succeeded in getting the law
passed,
but Taber refused to pay. Because this agreement was illegal,
the senator
could not seek payment from Taber in a court of law.
Because these agreements, like many other agreements

mentioned in this
chapter, often involve the commission of a crime_, the pa r ties
to an agreement
that interferes with the performance of a public duty may be
subject to criminal
penalties.
Contracts That Harm Family Life
Our society favors and encourages marriage and family life.
Therefore, agree-
ments that place unreasonable restraints or tend to discourage
marriage com-
pletely are generally illegal. For example, agreements are
illegal if one party
promises never to marry, promises not to marry for an
unreasonable amount of
time, or promises not to marry a certain person.
Siegel, fearing his only daughter would leave him, promised to
give her
$15,000 if she would never marry. The daughter agreed and
accepted the
$15,000. Two years later, she married. Siegel sued to recover
the $15,000.
The agreement is illegal, and he is not entitled to recover the
money.
On the other hand, an agreement that places a reasonable
restriction on mar-
riage is legally binding. For example, the courts have held that
an agreement to
postpone marriage until reaching the age of majority is legal.
This postponement
is considered legal detriment.
Because the law seeks to preserve marriage, an agreement

between a hus -
band and wife to obtain a divorce for consideration is illegal
and will not be
enforced.
Jason promised to give his wife $50,000 and a trip around the
world if
she would divorce him. His wife obtained a divorce, but Jason
refused to
carry out his part of the agreement. Because this agreement was
illegal,
Jason was not legally bound.
Contracts in Restraint of Trade
A covenant in restraint of trade is an agreement whereby one
party agrees to re-
strict (1) his or her freedom to trade or conduct his or her
profession or business,
(2) his or her business in a particular locality (i.e., where), or
(3) his or her busi-
ness for a specified period of time (i.e., when) . This covenant
may be contained
in a separate contract standing by itself or it can be a clause
added to a contract.
Covenants not to compete are often found in contracts for the
sale of an ongoing
business or included in employment contracts. Illegality is
determined by the
degree of restrictiveness sought by the party preparing the
agreement. Covenants
are valid if they are reasonable; however, covenants that are too
restrictive are
illegal, void, and therefore, unenforceable. The common law is
inclined against
agreements that prohibit or restrain a person from earning a
living. On the other

hand, the law imposes a lim it on contractual freedom in certain
cases in order to
preserve this freedom. The following discussion will clarify the
common law's
rationale that led to this conclusion.
Purchaser of a Business
When a person buys a business such as a recording studio, a
tool and dye busi-
ness, or a computer sales and service center, that person is also
buying the seller's
goodwill, the continued patronage of old and loyal customers.
No one would
want a business if the seller could open a similar business
nearby and draw away
the old customers. The purchaser needs some assurance that
customers will con-
tinue to trade at the old store. Consequently, it is customary to
include in the
purchase agreement a clause that prevents the seller from
competing in the same
business within a certain territory for a certain period of time.
This clause is re-
ferred to as a covenant not to compete (also known as a
noncompete agreement).
A covenant is legal and enforceable if the restrictions in terms
of scope, time, and
locality are no more than what is reasonably necessary to
protect the legitimate
interests of the party imposing the restraint. If the restrictions
are unreasonable,
the clause is illegal and void because the effect is to curtail
competition and

restrain trade, which violates the antitrust laws. The onus of
proving reasonable-
ness is on the party imposing the restraint. A very unique
business may require a
longer noncompete time than a business in a more conventional
area . For exa m-
ple, in an extreme case, a buyer of an armament business for a
large amount of
money was permitted to restrain the seller from competing with
this busines
anywhere in the world for twenty-five years due to the
worldwide operation of
the business sold, plus the fact that its main customers were
governments.
A territory restriction should not go beyond the trade area of the
business.
The trade area for a small card and gift business might be a mile
or two. If a busi-
ness is citywide, such as a Laundromat with stores in various
neighborhoods , a
clause restricting competition anywhere in the city might be
reasonable. Simi-
larly, if the business is statewide or national, such as a well-
known chain of mo-
tels, a restriction not to compete anywhere in the state or nation
may be upheld
as reasonable.
A time restriction should not be longer than is reasonably
necessary for the
purchaser to obtain the goodwill of previous customers and
attract new custom-
ers. In the sale of a popular fine -dining local restaurant,
twenty-five years wou ld
be unreasonable, two or three years may be reasonable, while a

restriction of one
year or less is pretty safe.
Santos operated a computer sales and service center in a town of
about
35,000 people. He sold his business to Murdock. The written
sales
agreement included a clause preventing Santos from opening a
computer
sales and service center in the town for a period of six months.
Because
both the time and territory restrictions were reasonable for a
town of
35,000 people, the clause in the sales agreement would most
likely be
enforced in a court of law.
Employment Contracts
Territory and time restrictions imposed by the purchaser of a
business may also
be imposed by an employer upon an employee who leaves his or
her present job
to work for a competing business. Should an employee sign?
There is no right an-
swer. Employers are generally permitted more protection
against the subsequenr
activities of senior employees than of junior employees or
temporary employees.
The employer must establish his legitimate interest in imposing
the restriction
because of a trade connection or a concern about trade secrets.
The employer.
however, cannot protect himself against the employees' personal
skill and knowl-
edge, even if acquired in the course of the employers' business .
The employer

must also show that the restraint is reasonable.
Noncompete agreements have become more common, and they
are no;:
going away. As loyalty between businesses (especially
corporations) and their
employees hits an all-time low, employers claim that more
employees are defect-
ing to competitors and divulging company secrets, keeping their
companies, em-
ployers say, from maintaining their competitive position. They
can't risk havin
competitors obtain trade secrets, which can be anything the
employer deems sen-
sitive or privileged: information about new software, hardware,
telecommunic a-
tions, customers, or whatever. To protect themselves, employers
are increasingly
asking all workers-not just the executives-to sign noncompete
agreements
preventing these workers from either setting up a similar
business or working for
a competitor who provides the same services as the old
employer. Even employ-
ees forced out of their jobs may be required to sign a
noncompete agreement.
Noncompete clauses are common in industries ranging from
pharmaceuticals
high -tech, and telecommunications to fast-food, sales, and
consumer products.
Generally speaking, agreements with noncompete clauses are
interpreted ac-
cording to the rule of reason, which means that they must be

reasonable in terms
of time period, geography, and what the person can and cannot
do. Today's non-
compete clauses generally bar someone from working for a rival
for six months
to five years. A five-year noncompete clause may run into
trouble in some states
as being too restrictive. According to the rule of reason, an
employee skilled in
two fields can be restricted in one field but not both.
When Detailman was hired at Tangles, a local hair salon, he was
required
to sign an employment contract that included a noncompete
clause
agreeing not to work for another salon within the 79904 ZIP
code area
for eighteen months after leaving the current salon. He did leave
Tangles
after three months and was immediately hired by a salon in the
same
zip code area. The new salon, however, specialized in ethnic
hair care.
Detailman had to be completely retrained in this area of
expertise. All
the training received at Tangles was actually of no use to him.
Detailman
did not provide his new employer with a customer list from
Tangles. His
former employer at Tangles sued Detailman, claiming that he
(Detailman)
was in violation of his noncompete clause.
In this example, assuming that Detailman was not violating any
technical
requirements under the law, a court most likely would rule that

he was not in
violation of his noncompete agreement and could not be stopped
from compet-
ing. The new salon was providing completely different services
from those of
Tangles. In addition, Detailman did not provide his new
employer a customer list
of his clients from Tangles, which most likely would have been
considered insig-
nificant after only three months of employment at this salon.
Frequently, a partnership agreement between professional
people contains a
clause stating that upon retiring or leaving the partnership, the
partner will not
start a competing business. These clauses are also enforceable if
the restrictions
on territory and time are reasonably necessary to protect the
remaining
partners.
Court Treatment of Unreasonable Noncompete Clauses
Courts generally do not favor noncompetition agreements
because, as mentioned
earlier, they prevent a person from working and earning a
living. Consequently,
many states either prohibit or heavily regulate these clauses.
Noncompete agree-
ments have been invalidated when an employee was fired
without cause (did not
do anything wrong) or was not reasonably compensated in
exchange for signing
the noncompete agreement. These states have taken this
approach because so
many noncompete clauses are deemed too restrictive. When
noncompete clauses

are found to be unreasonable, courts in different states generally
will follow one
of these guidelines:
1. Throw out the clause entirely, leaving the remainder of the
agreement to be
enforceable. This is the more common approach.
2. Apply the blue pencil doctrine, which holds that the court has
the power to
rewrite the covenant so that it is less restrictive. This way of
dealing with
the situation is relatively rare.
Applying the blue pencil doctrine is not what the courts wish to
do. Most
courts instead will follow the first procedure. Most important, if
you are asked
to sign a noncompete agreement that can substantially affect
your livelihood,
contact an attorney first.
unconscionable agreement:
contract so unfair or one-sided that it
will not be enforced
Contracts That Create a Monopoly or Limit Competition
A monopoly occurs when one person or business controls all or
nearly all the
trade or supply of a particular item within an area to the
exclusion of all compe-
tition. An agreement to create or maintain a monopoly is not
only opposed r
public policy, but it is also a violation of federal and state laws.

These laws, calle-
antitrust laws, are discussed in more detail in Chapter 28.
Four trash-hauling companies in a certain city attempted to
avoid a
"trash war" by agreeing not to solicit each other's accounts
through
agreements containing covenants not to compete. During the
seven
years that this agreement lasted, the companies brought in more
than
$20 million in total revenue. Because the trash-hauling
companies
tended to create a monopoly, their agreements were illegal and
therefore
unenforceable. What the trash haulers did might also be
considered
a criminal conspiracy. If convicted, the penalty could be a fine,
imprisonment, or both.
Not all monopolies are illegal, however. Companies such as
utilities compa-
nies are given the exclusive right by government to provide a
product or service
within a certain area. Only when a business deliberately and
unreasonably seeks
to eliminate competition is it illegal. Microsoft Corporation is a
good example.
It started as a partnership in 1975, but due to the ingenuity of
the two origina:
partners, it has become a giant corporation and has developed
into the world-
wide leader in services and Internet technologies for personal
and business com-
puting. The U.S. Department of Justice brought a lawsuit
claiming that Microso~

used its power to target competitive companies and should be
broken up rc
weaken its monopoly power and increase competition, even
though it appea r·
that Microsoft became a dominant force as a result of the skill
and innovatiw
practices of its original founder. The business has developed
into what might be
considered a natural monopoly with no evil intent, but rather a
focus on develop-
ing technology for the next-generation Internet. Microsoft is
working to enable
businesses to be collaborative and offers an unprecedented
range of integrated
and customized solutions that enable their customers to act on
information wher-
ever and whenever they need it.
An agreement that limits competition by controlling or fixing
prices, divid-
ing up trade territory, or limiting production is also considered
illegal and vio-
lates both federal and state antitrust laws.
Contracts That Are Unconscionable
Unconscionable agreements violate public policy. An
unconscionable agreement
is one that is entered into under the following circumstances:
(1) A party lack
the knowledge and/or understanding of the terms of the
agreement or (2) the
agreement is too grossly unfair or harsh. With regard to the first
reason, some
contracts are written in a very legal form using "lawyer
language" that one party
to the agreement does not understand. Or, the agreement may

contain terms in
very small print limiting the liability of one of the parties or
include hidden
clauses in fine print that the party obligated to sign the
agreement missed. With
regard to the second reason, there are no limits to the types of
contracts a cou rr
will find unfair or harsh. Among modern court decisions,
including decision
governing the sale of goods under the UCC, unconscionability
has been applied
to contracts involving questionable sales tactics, unequal
bargaining power o ·
the parties, the basic illiteracy of one party, and grossly
excessive price term s.
Unconscionability bas been applied to standard contracts that
favor one par ty
over another, such as a lease that favors the landlord or an
insurance policy th at
favors the company and must be accepted on a take-it-or-leave-
it basis, contract
with clauses disclaiming liability, and contracts with provisions
requiring a buyer
to waive certain legal rights.
Belmede, a migrant from a foreign country with an inability to
speak
English well, signed a car loan to purchase a van through a
dealership
that supposedly charged her 15 percent interest. The salesperson
told
Belmede that as an immigrant with little credit history, 15
percent was
the best she could expect. She was unaware that other local

dealers were
charging as low as 4 percent. Belmede, a single mother of four
who was
working two jobs, felt she had no other choice. She signed the
original
paperwork agreeing to pay what she thought was 15 percent
interest and
made a down payment of $2,500. A week later, the dealership
called
her back to sign additional paperwork, saying that the van
would be
repossessed if she didn't sign. Belmede signed without reading
anything.
A friend encouraged her to check with another dealership
offering vans at
a lower interest rate. This new dealership reviewed her
paperwork with
the original dealership and discovered that she was actually
paying 29
percent interest. Her $9,000 van was going to cost her more
than $16,000
over the life of the loan, despite her having paid $2,500 as a
down
payment. Belmede attempted to get out of her loan agreement
with the
original car dealer but was turned down. When she refused to
continue
payments as agreed, the original car dealer sued.
Because this contract seemed unfair (unconscionable), a court
most likely would
refuse to rule in favor of the original car dealership that had
made what would
be considered a predatory car loan.
By now, you may have begun to realize by the nature of the

discussion in this
section that the defense of unconscionability is seldom applied
to contracts be-
tween business persons. One party is generally a consumer.
artially Illegal Contracts
EARNING OBJECTIVE~
Describe the effect of contracts
that are partially legal and
partially illegal.
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A contract may be partially legal and partially illegal. The legal
part of the con-
tract may be enforced as long as severance would not distort the
remainder, sub -
stantially change the contract, or deprive one party of
substantially the whole or
main consideration under the original contract. If the contract is
so complicated
that it is not possible to separate the illegal part, the entire
contract is void and
unenforceable.
McGrail was studying to become a licensed electrician. It was

illegal in
his state to perform services for the public without a license.
Nevertheless,
he purchased and then installed some light fixtures for a
neighbor. Even
though McGrail could not collect for the cost of his labor in
installing the
light fixtures because he was not properly licensed, he could
collect for the
cost of the light fixtures.
Answer True (T) or False (F).
1. A public garage's disclaimer of liability for a car lost or
stolen because of the garage owner's negligence is likely
to be unenforceable. T F
2 . Exculpatory clauses relieve a party in advance for liability
for the tort of negligence. T F
3. If an agreement contains an illegal part that can be
separated, the entire agreement is void. T F
4 . Knebel's parents promised her $5,000 if she would not
marry before age 21. This agreement is void. T F
5. A professional gambler is one who participates in a
gambling event socially and for pleasure. T F
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Business Law Principles and Practices Golclman, A ., .docx

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