Chapter 17: Illegality

Business Law, Sixth Edition
© 2019 BVT Publishing. All rights reserved.
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Chapter 17:
Illegality

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Learning Objectives
• Explain the status of illegal contracts.
• Understand violations of license
requirements.
• Discuss usury.
• Examine violations and activities in restraint
of trade.
• Recognize agreements not to compete.
• Describe contracts of adhesion.
• Understand contracts disclaiming liability.
• Understand tickets disclaiming liability.

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17.0 In the News (Slide 1 of 2)
Illegal Gambling Case Is Kicked Out Of Court
http://bvtlab.com/qc8A9
There is very little case law that specifically focuses
on the business practices and legal issues
surrounding the vastly expanding realm of exports.
This case, which centered around a claim that a
company was aiding and abetting illegal gambling,
could have provided promising precedent, but it has
been punted by a U.S. District Court and will now be
adjudicated in arbitration.

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17.0 In the News (Slide 2 of 2)
• What makes this case illegal?
• If it is illegal, should arbitration even be
allowed?
• Does it matter that the plaintiff’s are
teenagers? Explain.

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17.1a Litigation Disallowed in
Illegal Contracts
A valid contract must have a lawful
purpose
or object.
• If the contract is illegal, courts will not allow
litigation to be used to enforce promises
made or cure performance issues.
– Contours of the type of illegal contract may
vary from state to state.
– Courts will “leave the parties where they found
them.”

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17.1a Critical Thinking (Slide 1 of 2)
Case: Bassidji
Guarantees of payments made by an American
citizen furthered a trade agreement which was
prohibited by an executive order. The court
reasoned that the guarantee by Goe fell directly
into one type of behavior that was prohibited, so
the guarantees are not enforceable.

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17.1a Critical Thinking (Slide 2 of 2)
• Is Goe benefiting unfairly by the
court’s decision? Why?
• How does the court treat parties who
enter into a contract that has an
illegal purpose?

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17.1b Exceptions
Three exceptions qualify for court relief.
• The party is within the group to be
protected.
• The contract is induced by fraud or
duress.
• Locus poenitentiae: a party to an illegal
contract changes their mind about
wanting to be bound and has not
performed any part of the illegal
agreement

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17.2a Introduction: Agreements in
Violation of Statutes
A contract may be void and unenforceable if
it violates a statute.
• A court may simply strike a specific clause
that it finds in violation of an act passed.
• Administrative agency regulations are
included in the definition of a “statute.”
• Statutes to protect public interest are more
important than enforcing the private
agreement.

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17.2b Violations of License
Requirements
If the purpose of the license is to
protect the public:
• The party receiving benefit can refuse to
pay an unlicensed plaintiff on the ground
that the contract is illegal.
If the purpose of the license is to
raise revenues:
• Failure to obtain license will not void a
contract.

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17.2c Usury
State statutes limit the amount of interest
that may be charged on borrowed money.
• If it exceeds maximum interest allowed:
– Usurious and illegal
– Civil penalty—denied right to collect interest
– Lender is denied interest and principal—few
states
– Criminal penalties for charging illegal interest
• In most states, there is no maximum legal rate
of interest when the borrower is a business.

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17.2b Critical Thinking (Slide 1 of 2)
Case: Galloway
Pro se plaintiff filed a lawsuit alleging usury in a
sales contract for multiple site timeshare
vacation homes. Plaintiff alleged the sales price
and interest charges for the contract were
“loans” within the meaning of the Virginia usury
laws. The court held that the extension of credit
is not a loan within the meaning of the statute.

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17.2b Critical Thinking (Slide 2 of 2)
• Why did the court decide that the timeshare
contract, including a finance charge, was not
in violation of state usury law?
• The plaintiff here was a “pro se litigant.” This
means that the plaintiff was acting on her
own behalf without the assistance of an
attorney. While state laws generally allow
individuals to represent themselves, does the
case point out any negative aspects of
participating pro se?

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17.2d Agreements and Activities in
Restraint of Trade (Slide 1 of 3)
Antitrust laws serve to protect our
economic system.
• They preserve competition by using three
basic sanctions:
– Federal felony punishable by fine or
imprisonment or both
– Injunctions to prevent and restrain violations
– Injured party may collect treble (triple) damages
plus court costs and fees.

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• The Sherman Act prohibits contracts in
restraint of trade.
– Illegal only if they unreasonably restrain
trade
– Illegal per se, meaning they are conclusively
presumed to be unreasonable
– Rule of reason: illegal only if the facts
establish that they are unreasonable
• Price-fixing is illegal per se.

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• An agreement among competitors to
divide territories is illegal per se.
• Price discrimination is illegal under the
Robinson-Patman Act.
• A tying agreement is illegal per se.
• Exclusive arrangements and reciprocal
dealing can be illegal.

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17.3a Introduction: Agreements in
Violation of Public Policy
A contract provision is contrary to
public policy if it:
• Is injurious to the interests of the public
• Contravenes some established interest
of society
• Violates the policy or purpose of some
statute
• Tends to interfere with the public health,
safety, morals, or general welfare.

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17.3b Agreements Not to Compete
Types
• Sale of Business
• Employment contracts
Will be enforced if covenant is:
• Reasonable in point of time
• Reasonable in the area of restraint
• Necessary to protect goodwill
• Not placed as an undue burden on the
covenantor
• Not in violation of the public interest

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17.3a Critical Thinking
Case: Emerson Electric
A covenant not to compete included within an
employment contract is found to be enforceable.
The agreement recognized an interest of the
former employer in protecting its relationship with
its customers.
• What specific actions did Rogers undertake that
violated the covenant not to compete?
• According to the court, when is a covenant “not to
compete” legal?

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17.3c Unconscionability
Power of judge to strike contract or a
provision of a contract to prevent
oppression and unfair surprise
• Parties must be able to find and
understand all material terms.
• Parties must be able to bargain over the
terms.
- Procedural unconscionability
- Substantive unconscionability

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17.3d Contracts of Adhesion
Standardized contract prepared
entirely by one party
• Usually evidencing unequal bargaining
power
- Not always illegal, but examined for
fairness

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17.3e Contracts Disclaiming Liability
Exculpatory clause: contractual
provision indicating that a party has no
tort liability even if they are at fault
• Some are valid, some not.
• Parties may bargain regarding liability, but
such provisions will not be enforced if the
parties do not have substantially equal
bargaining power.

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17.3f Tickets Disclaiming Liability
It is generally held that the printed matter
on the ticket is a part of an offer that is
accepted by the holder of the ticket.
• The ticket is received as evidence of
ownership, the provisions are not part of
contract.
• Many terms on tickets may be
unconscionable and will not be enforced.

Chapter 17: Illegality

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Chapter 17: Illegality