Chapter 15 – Illegality
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Powerpoint from textbook Business Law - the ethical, global, and e-commerce environment to accompany BA 330 course at the University of Alaska Fairbanks.
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Chapter 15 – Illegality
- 1. Introduction to Contracts The Agreement: Offer The Agreement: Acceptance Consideration Reality of Consent © 2010 The McGraw-Hill Companies, Inc. All rights reserved.
- 2. Capacity to Contract Illegality Writing Rights of Third Parties Performance and Remedies © 2010 The McGraw-Hill Companies, Inc. All rights reserved.
- 3. Illegality In a free society the state does not administer the affairs of men. It administers justice among men who conduct their own affairs. Walter Lippman © 2010 The McGraw-Hill Companies, Inc. All rights reserved.
- 4. Learning Objectives Meaning of illegality Types of illegal agreements Effect on contracts Special doctrines 15 - 4
- 5. Illegality An agreement will be unenforceable because of illegality if the agreement involves an act or promise that violates a law or is against public policy Even if there was voluntary consent between two parties who have capacity to contract Effect: no remedy for breach of an illegal agreement 15 - 5
- 6. Coma Corporation v. Kansas Dep Facts & Procedural History: Coma Corp. (Coma) entered into employment contract with undocumented worker for above-minimum wage, but paid less than agreed amount, then fired worker Worker filed claim with Dept. of Labor (DOL), which awarded above-minimum wages Coma appealed; court reduced DOL’s award to minimum wage due to illegality of contract 15 - 6
- 7. Coma Corporation v. Kansas Department of Labor The Appeal to Kansas Supreme Court: Coma’s argument: employment contract unenforceable and federal immigration laws preempt state wage laws Court: federal preemption not presumed, and to deny enforceability of employment contract would contravene Kansas public policy to protect wages and wage earners Reversed in favor of KS Dept. of Labor 15 - 7
- 8. Agreements That Violate Statutes Sometimes government legislatures enact statutes that declare certain types of agreements unenforceable, void, or voidable Examples: New law changes the limits allowed for interest to be charged on a loan New law prohibiting creation of a landfill in environmentally sensitive areas 15 - 8
- 9. Agreements That Violate Public Policy Agreements that violate public policy include: Agreements to commit a crime Agreements promoting an illegal purpose Agreement to perform an act for which the person is not properly licensed Agreements in restraint of competition 15 - 9
- 10. Licensing Statutes A common regulatory statute requires a person to obtain a license, permit, or registration before engaging in a certain business or profession If the purpose of the statute is to protect the public against dishonest or incompetent practitioners, then an agreement is unenforceable if an unlicensed person agrees to do an act that requires a license 15 - 10
- 11. Riggs v. Woman to Woman, P.C. Facts & Procedural History: Riggs joined defendant medical practice after assurances that the medical practice was a licensed professional corporation Employment agreement contained a covenant not to compete Riggs discovered that defendant was not a licensed professional corporation 15 - 11
- 12. Riggs v. Woman to Woman, P.C. Issue & Court’s Discussion: Was the employment agreement void because defendant was not licensed? Defendant properly attempted to obtain the license and when it determined it was not properly licensed, it remedied the situation and obtained the license Had operated as a de facto corporation 15 - 12
- 13. Riggs v. Woman to Woman, P.C. Court’s Analysis & Ruling: Purpose of the licensing act is permissive – to allow a medical practice the protections of a corporation; not to protect the public Since defendant did nothing illegal, the contract is not void 15 - 13
- 14. Agreements in Restraint of Competition If the sole purpose of an agreement is to restrain competition, it violates public policy and is illegal If the restraint on competition was part of an otherwise legal contract, the result may be different because the parties may have a legitimate interest to be protected by the restriction on competition 15 - 14
- 15. Non-competition clauses Courts enforce a non-competition clause if: It serves a legitimate business purpose, The restriction is reasonable in time, geographic area, and scope It does not impose an undue hardship Example: Nasc Services, Inc. v. Jervis in which the clause would “create an oppressive and unfair scenario” for former employees 15 - 15
- 16. Exculpatory Clauses An exculpatory clause (a release or liability waiver) in a contract attempts to protect one party from liability for damages Exculpatory clauses are perhaps suspect on public policy grounds, but courts do not want to interfere with the agreement if it does not threaten public health or safety Example: McCune v. Myrtle Beach Indoor Shooting Range, Inc. 15 - 16
- 17. Unconscionable Agreements Under the doctrine of unconscionability, courts refuse to grant the equitable remedy of specific performance for breach of contract if the contract is oppressively unfair Unconscionability means the absence of meaningful choice together with terms unreasonably advantageous to one of the parties 15 - 17
- 18. Unconscionable Agreements UCC 2–302 gives courts power to refuse to enforce all or part of a contract for the sale of goods or to modify such a contract if it is found to be unconscionable Example: Circuit City Stores, Inc. v. Mantor Company pressured and threatened employee to sign an agreement to arbitrate in the event of dispute, but court believe it had gone too far Clause was unconscionable, therefore the contract was unenforceable 15 - 18
- 19. Contracts of Adhesion A contract of adhesion is a contract, usually on a standardized form, offered by a party who is in a superior bargaining position on a “take-it-or- leave-it” basis Courts will enforce the contracts unless the term is harsh or oppressive 15 - 19
- 20. Test Your Knowledge True=A, False = B An agreement that promotes violating an environmental permit is illegal A person can demand restitution for breach of an illegal agreement Non-competition agreements are illegal agreements 15 - 20
- 21. Test Your Knowledge Multiple Choice A contract of adhesion: (a) is always illegal (b) are contrary to public policy (c) is a “take it or leave it” agreement An exculpatory clause: (a) Protects one party from liability for damages (b) Promotes violation of a civil law (c) Is contrary to public policy and illegal 15 - 21
- 22. Thought Question Do you think enforcing non-competition clauses in employment agreements is good public policy? 15 - 22
Editor's Notes
- The hyperlink is to the Kansas Supreme Court’s opinion.
- The “winner” here was the worker, Cesar Martinez Corral, who was awarded back wages, but faced deportation. According to John Hanna in an article published March 24, 2007, in the Lawrence Journal-World (http://www2.ljworld.com/news/2007/mar/24/illegal_immigrant_wins_ruling_unpaid_wages/) : “The company argued, The company argued that Corral had accepted lower pay - and a place to live - until business at the restaurant picked up. The restaurant eventually closed in May 2004, costing Corral his job after seven months, said Diane Barger, an attorney representing Coma Corp.”
- The hyperlink is to the case opinion.
- The defendant medical practice had tried to register the company, but there was a technical flaw and the state corporate filings division had mailed the documents to the wrong address. Once the practice discovered the error, it was promptly corrected. These are the type of facts that create a de factor corporation rather than a de jure (by law) corporation. This subject will be discussed in greater detail in later chapters.
- Court: “Plaintiffs argue that the covenants are reasonable both as to duration and geographic extent…. Defendants provide no unique services nor possess any extraordinary skills that could harm plaintiffs if they continue to work for the Red Bull or for any other employer in the soccer industry.…Plaintiffs have no legitimate protectable interest in preventing defendants from continuing to teach children how to play soccer…. In the current case, however, the balancing of the equities supports denial of plaintiffs’ application for injunctive relief. If plaintiffs’ application is granted, defendants will be …barred from working for any comparable business in any capacity in any part of the world. Five of the six defendants will also be forced to leave the United States because their visas depend upon their employment. This would create an oppressive and unfair scenario for defendants.” .
- Case Example: McCune v. Myrtle Beach Indoor Shooting Range, Inc. Christine McCune went to the Myrtle Beach Indoor Shooting Range to participate in a paintball game with her husband and friends. Before being allowed to participate, McCune signed and dated a waiver that purported to release the Range from liability for all known or unknown dangers for any reason with the exception of gross negligence on the part of the Range…. While playing in a match, McCune caught the mask on the branch of a tree. The tree was obscured from her field of vision by the top of the mask. The mask was raised off her face because it was loose, and provided no protection against an incoming paintball pellet. The pellet struck McCune in the eye, rendering her legally blind in the eye. McCune brought a negligence suit against the Range. The Range filed a motion for summary judgment, alleging the waiver barred liability on its part. The court granted the Range’s motion, and McCune appealed. Court: “It is clear McCune voluntarily entered into the release in exchange for being allowed to participate in the paintball match. Additionally, she expressly assumed the risk for all known and unknown risks while participating….. We find the release entered into by the parties does not contravene public policy.”
- Mantor began working for Circuit City. When hired, Circuit City had no arbitration program. In 1995, Circuit City instituted an arbitration program called the “Associate Issue Resolution Program” (AIRP). Circuit City emphasized to managers the importance of full participation in the AIRP, and stressed that employees had little choice in this matter. They suggested that employees should sign the agreement or prepare to be terminated. Although Circuit City circulated the forms regarding the AIRP in 1995, Mantor was able to avoid either signing up or openly refusing to participate in the AIRP for three years. In 1998, two Circuit City managers arranged a meeting with Mantor to discuss his participation in the AIRP. During this meeting, Mantor asked the two Circuit City managers what would happen should he decline to participate in the arbitration program. They responded to the effect that he would have no future with Circuit City. In February 1998, Mantor agreed to participate in the AIRP, acknowledging in writing his receipt of (1) an “Associate Issue Resolution Handbook,” (2) the “Circuit City Dispute Resolution Rules and Procedures,” and (3) a “Circuit City Arbitration Opt-Out Form.” Two years later, Mantor was terminated and he filed suit. Court: “Circuit City management impliedly and expressly pressured Mantor not to opt-out, and even resorted to threatening his job outright should Mantor exercise his putative “right” to opt-out. The fact that Circuit City management pressured and even threatened Mantor into assenting to the arbitration agreement demonstrates that he had no meaningful opportunity to opt-out of the program. . . . . Because any earnest attempt to ameliorate the unconscionable aspects of Circuit City’s arbitration agreement would require this court to assume the role of contract author rather than interpreter, we hold that this agreement is unenforceable in its entirety.”
- True. False. No remedy for breach of an illegal agreement. False. Courts enforce a non-competition clause if : i t serves a legitimate business purpose; the restriction is reasonable in time, geographic area, and scope; and it does not impose an undue hardship.
- The correct answer is (c) The correct answer is (a)