10
CHAPTER
Legal Purpose
and Proper Form
10-1 Illegal Agreements
10-2 The Statute of Frauds
10-1 Illegal Agreements
GOALS
Identify various forms of illegal
agreements
Distinguish agreements that, although
illegal, the courts will enforce
FOCUS
Identify types of contracts that society,
through its courts of law, should not
enforce even though all the essential
elements for an enforceable contract are
present.
WHICH AGREEMENTS
ARE ILLEGAL?
Illegal lotteries – Most states forbid or regulate gambling
with statutes.
– To be a lottery you have
A prize
A chance (winner determined by luck)
Consideration (payment to participate)
– A Wager – most common form of gambling. bet on the
uncertain outcome of an event.
– Legalized gambling could be:
Casinos
Pari-mutuel betting – betting in which the winner share the total
prize pool
State-run lotteries
Bingo games and pull-tab betting
WHICH AGREEMENTS
ARE ILLEGAL?
Agreements to pay usurious interest – lending money at
a rate higher than the state maximum allowable rate.
– If no rate is stated you pay the legal rate of interest which is
specified by state statute. (7 to 12%)
– Higher rates are allowed for loan companies and pawnbrokers.
Agreements involving illegal discrimination
Agreements that obstruct legal procedures
– Includes to pay non-expert witnesses in a trial to testify, or pay
for false testimony, bribe jurors, refrain from informing on or
prosecuting an alleged crime in exchange for money or other
consideration. (Called Compounding a crime)
WHICH AGREEMENTS
ARE ILLEGAL?
Agreements made without a required
competency license –
– Competency license - persons need in certain
occupations. Persons who lack the required
competency license may not enforce the contracts
they make in doing the regulated work.
Agreements that affect marriage
negatively
WHICH AGREEMENTS
ARE ILLEGAL?
Agreements that restrain trade unreasonably – US economic system
based on free and open competition.
– Price fixing – crime under federal law. Agreements to fix prices
are therefore unenforceable. When competing firms agree on
the same price to be charged for a product.
bid rigging – occurs when competitors who bid on jobs agree
that one bidder will have the lowest bid for a particular job.
They take turns being the lowest bidder.
– Resale price maintenance – illegal to for manufacturers to agree
with retailers to sell the product at a particular price. (Can have
a suggested retail price.)
Questions
Razer agreed with several published articles that
criticized laws prohibiting the production, possession,
and use of marijuana. The authors of the articles
claimed such legislation was unrealistic and often
violated civil rights. Razer agreed so heartily that he
bought several dozen marijuana plants from a friend,
Sara. Then he rented a patch of isolated land and
persuaded the owner, Tom to accept a share of the
proceeds from the sale of the anticipated crop as rent.
After harvesting the first crop, Razer sold most of the
product to a local drug dealer for $7500. Were any of
Razer’s agreement illegal?
All of the agreements were criminal and therefore void.
Agreements not to compete?
– Allocation of markets – when competitors divide
markets between themselves.
– Agreements not to compete – are illegal except when
persons are hired they have a non-compete clause.
They become illegal if unreasonable:
Time period for the limitation
Geographic area
employer’s interest protected by the limitation
Name four of the eight illegal
agreements discussed in this
section.
Illegal lotteries, usurious loans, discriminatory
agreements, agreements that obstruct legal
procedures, agreements made without a
competency license, agreements that affect
marriage negatively, agreements that restrain
trade unreasonably, agreements not to
compete.
WHEN WILL THE COURTS ENFORCE
ILLEGAL AGREEMENTS?
Most illegal contracts are void and unenforceable. Except when
connection between illegality and the agreement is small or there is
an innocent party. In these cases restitution is allowed.
– Restitution – recovery of consideration
Protected victims – If contact violates a law designed to protect a
party to the agreement. The victim may obtain restitution.
– If agreement was created by fraud, duress, misrepresentation, or undue
influence, the victim may obtain restitution.
The excusably ignorant – can either enforce the legal part of the
contract or obtain restitution. This person who:
Does not know the contract is illegal but,
The other party knows the transaction is illegal and
the illegality is minor.
WHEN WILL THE COURTS ENFORCE
ILLEGAL AGREEMENTS?
Rescission prior to illegal act – if a party rescinds before the illegal act
occurs, then restitution will be available.
Divisible contracts – Contracts can contain a combination of legal and illegal
provisions. Courts may enforce the legal part of a contract if it is divisible.
Divisible – means that separate consideration is given for the legal and illegal parts
Unconscionability – UCC governing the sale of goods makes these. This occurs when
there is a grossly unfair contract that parties under ordinary circumstances would not
accept. These are illegal
– Procedural Unconscionability – shown by how the contract is created. Arises when contracts
contain very fine print, light typesetting, elements of fraud, duress.
– Substantive unconscionability – arises from unfair terms in the agreement. Can be a price so
high that it shocks, very one-sided terms.
– Most courts want both procedural and substantive unconscionability before the contract is
deemed unconscionable and illegal.
– Courts can refuse to enforce, enforce parts or modify the terms of an agreement ruled
unconscionable.
Questions
A young couple, the Guptas, wanted to provide for the college
education of their infant daughter. They received this offer in the
mail from the True Bonanza Mining Corp., which seemed perfect for
their need. “Join us now for only 10 cents a share of stock. Become
part owner of a gold and silver mine with already proven mineral
deposits. In ten years, you will be rich enough to retire.” The Gupta
used all their savings to buy 250,000 shares of Bonanza stock.
Months later they learned that Bonanza had violated the law. It’s
“proven mineral deposits’ were commercially worthless aluminum
oxide. The sales agreement was illegal. Can the Guptas recover
their $25,000?
Blue sky laws prohibit sales of worthless stocks and bonds. The
Guptas would have restitution to recover money.
Under what circumstances will the
courts enforce illegal agreements?
The courts will do so in order to help
relatively innocent or ignorant parties out
of their bad bargains.
Questions
Crump was coming up for trial on felony
charges. He paid the judge in the case $10,000
to make errors in conducting the trial so that
crump’s conviction could be over turned on
appeal. When the appeal failed, Crump sought
to sue for restitution of the $10,000. Should he
be allowed to recover the bribe? Why or Why
not?
No. However, the two are not of equal guilt (in
pari delicto)
Questions
Dixon, a wholesaler, was on the brink of bankruptcy. He
bought fire insurance policies for more than twice the
value of the. building and contents from two companies.
Then he arranged to pay a character know only as
“Sparky” $5000 to “torch” his business building. If Sparky
did so but Dixon did not pay him, could Sparky enforce
the contract for $5000? Could Dixon legally collect on
his insurance policies if Sparky torched the building?
No. The agreement with Sparky was void because it
was a contract to commit a crime. No, Dixon could not
recover the insurance money because he would have
committed a crime in causing the burning of the insured
buildings.
Questions
A new boss was scheduled to take over Patty’s
department in three weeks. Patty agreed to pay
Nancy $600 to remove unflattering information
from her personnel file so she would look good
to the new boss. The day before Nance was
going to do it, Patty called and told her not to.
She also asked for her money back. Nancy
never took the information. Could Patty sue and
recover her money?
If Patty had paid, she could recover her money
because she rescinded before the illegal act.
Questions
Cliff worked as a site manager for an oil-drilling company. When a
drill bit broke, he called Texas Bit Company, a bit manufacturer. Cliff
asked for a bit able to cut quickly through granite. The salesperson
recommended their model 2123 which was described as a high
carbon steel bit with diamonds embedded on the cutting edges. The
salesperson quoted a fair price but she said there were no
warranties and that the product was being sold, “as is.” This is an
unusual practice in this industry. Cliff didn’t think he could get that
type of bit from anyone else without a big delay so he ordered it. It
turned out that the bit was made only of low-carbon steel and it cut
very slowly. Is there procedural unconscionability here? Is there
substantive unconscionability here? Did the bit company create an
unconscionable contract?
Yes, there is procedural unconscionability in the misrepresentation
about the drill bit’s carbon content and yes there is substantive
unconscionability in the requirement that the bit be sold “as is”.
Therefore the contract is illegal.
Questions
A remote community and the surrounding countryside
had no doctor. The city council advertised for help,
offering free office space, a six-bed infirmary, and a three
year contract. Glamorgan applied and was accepted.
Three months later, the council learned that although
Glamorgan had a medical degree, she had failed to pass
the state examination required to practice medicine. No
patients complained, but the council summarily
discharged her. Glamorgan sued for breach of contract.
Will she win the lawsuit?
No, Glamorgan will lose because she does not have the
required competency license
Questions
Randy entered into a contract to provide a
computer program to a New Jersey school
district. He used without permission parts of a
computer program copyrighted by another
programmer. The portion of the program that
violated the copyright law cost $12,000 and the
part that didn’t violated the copyright law cost
$44,000. he delivered both parts to the school
district. Can he recover anything for his work?
If the contract is divisible he can collect $44,000
10-2 The Statute of Frauds
GOALS
Explain why the Statute of Frauds is
necessary and what it requires
Identify the main instances when the
Statute of Frauds requires a writing
Understand the rules of contract
interpretation
FOCUS
Must all contracts be in writing?
WHY HAVE A STATUTE
OF FRAUDS?
Contracts within the Statute of Frauds – those the states require be
placed in writing to be enforceable in court.
Contracts to buy and sell goods for a price of $500 or more.
Buy/sell real property
Contracts require more than 1 year to complete
Payment of debt/obligation of another
Promises to give something of value in return for a promise of marriage.
– If contracts that fall under Statue of Frauds are not in writing then:
Executed contracts – contract that has been fully performed. Courts leave
the parties where they are. Neither party can reverse the contracts. ( You
receive the pizza and pay for it)
Executory contracts – contract not fully performed. Courts have these as
unenforceable and will not take action on either party to enforce the contract.
May be able to get back any consideration by suing based on quasi-contract.
(exists when some element of an enforceable contract is missing.) Courts
award $ to prevent the unjust enrichment of one party. Requirements of the
writing (You call and order a pizza to be delivered.)
Questions
While they were playing golf, Haka orally agreed to buy
an apartment building from Simon. In a later telephone
conversation, Haka promised Simon $100,000 as a
down payment on the purchase price with the balance to
be paid within five years. Simon promised to deliver the
deed to the property at the time the down payment was
made. Both parties were satisfied that all the terms had
been completely negotiated. Later Haka found a better
deal and told Simon he was backing out. Is Haka’s
contract with Simon enforceable?
This was a transfer of real property and therefore
needed to be in writing. This oral agreement would not
be enforceable in court.
Requirements of the Writing
Requirements vary for state to state.
– Statute of Frauds requirements – vary from state to state. Some only need to
indicate there is a contract. Most stringent ones must contain essential terms:
Name of parties
Subject matter description
Price
Quantity
Signature
Other essential terms (depends on nature of transaction) Can include method of
delivery, if real estate description of realty.
– UCC requirements – almost the same in every state. Writing must indicate only:
Quantity of goods
That the contract has been created between parties.
– Special rules for signatures –
under statue of frauds only the names signed on the contract can be sued for
enforcement. Signature may be written, stamped, engraved, printed or a mark intended
to be a signature.
Under UCC signed by one party and sent to the other party is enforceable against the
other party unless the other party objects to the terms of the contract within 10 days.
Name the six essential elements
in a writing required by the most
demanding Statutes of Frauds
standards.
Names of the parties, subject matter
description, price, quantity, signature, other
essential terms.
TYPES OF CONTRACTS WITHIN
THE STATUTE OF FRAUDS
Executory contracts that must be in writing and signed by the party
against whom the contract is to be enforced.
– Contract for the sale of goods for $500 or more
UCC exceptions:
–
–
–
–
Goods ordered to be specially manufactured
When goods ordered and paid for
When goods have been received and accepted by buyer
When party against whom enforcement is sought admits that oral contract was
made.
Contract to sell an interest in real property
– Exceptions that will enforce oral contract if seller gave contract to buyer
and buyer has
Made payment
Occupied the land
Made substantial improvements to land
Contracts that require more than one year to complete
– Begins when contract made
TYPES OF CONTRACTS WITHIN
THE STATUTE OF FRAUDS
Contract to pay a debt or answer for another’s debt
– Collateral promise: promise of payment of debts for another.
Needs to be in writing.
– Primary promise: promise of payment for self. Does not have to
be in writing
– Exception—main purpose rule (promise serves the promisor’s
own interest)
Contract for which the consideration is marriage – needs
to be in writing when one promises to marry in return for
something other than the other’s promise to marry.
Questions
Cervante and Joan were good friends. When they
graduated from high school, bother were 18. They
planned to marry, but first they wanted to become
financially secure. So they shook hands and agreed to
become partners in operating a small restaurant serving
Indian cuisine. “This just beginning” Joan said. “I’ll
death do us part” both said. Are they legally bound to
remain partners in business until one of them dies?
This does not need to be in writing because it can be
completed within one year (unknown). Missing essential
elements such as defined time period. Either party can
withdraw at any time.
Name the five types of executory
contracts that require a writing.
Contracts for the sale of goods valued at
$500 or more, contracts to sell real
property, contracts that cannot be
completed within one year, contracts to
pay debts of another, contracts when
consideration in marriage.
HOW ARE CONTRACTS
INTERPRETED?
Integration clause – both parties agree that the terms in the written contract
and the contract is complete and final.
Specific rules of interpretation
– Analysis – main purpose of the contract
– Conflicting terms
Handwritten term prevail over typewritten terms
Amounts written in words prevail over amounts written in figures
Typewritten and handwritten terms prevail over printed terms.
– Words - using plan and normal definitions
– Authors of ambiguity – if ambiguous goes against the writer.
Contract of adhesion – contracts prepared by the stronger parties
– Implied reasonableness – when no time stated for performance a reasonable
time is allowed.
HOW ARE CONTRACTS
INTERPRETED?
Parol evidence rule - words spoken prior to the execution of the final writing
or at the time of signing are not allowed to be considered in court.
– Exception to the parol evidence rule
To clarify ambiguities in the written agreement
If written contract was not intended to be a complete agreement
If a condition necessary to the existence of the contract never occurred.
If fraud, forgery, illegality, mistake, or misrepresentation occurred.
To show the parties reached another agreement or terminated the contract under
consideration after executing the written contract.
To show that the contract is voidable because a party laced contractual capacity.
Explain the parol evidence rule.
The parol evidence rule requires that the
final written version of the contract be the
sole source of evidence about its terms.
Therefore, no oral evidence to contradict
the terms of the writing can be introduced
unless it falls into one of the categories of
exceptions.
Questions
Jason’s father, Phil died. He left credit card bills
totaling $17,000 and some additional small bills.
His only asset at the time of death was a savings
account with $6,000 in it. One of the credit card
companies called Jason. In his grief, Jason
orally promised to pay them the balance of his
dad’s account $2,000. Is this promise
enforceable in court?
No, this oral promise to pay the debt of the
father is not enforceable, if Jason was going to
pay with his own money.
Questions
A salesperson tries to persuade you to buy an electonic,
musical instrument. The price is $499, plus carrying
charges of $72. The sales person says’, “You’ll soon be
the life of the party. If not, just return it and get your
money back.” You sign an installment payment contract,
which includes or integration clause but which says
nothing about a return privilege. Can you hold the seller
to the promise to accept to return?
No, the parol evidence rule will bar testimony about the
prior and statements regarding written policy.
Questions
Under a written contract, Cabrera bought a used sedan
from Sharpe’s Previously Owned Cars, Inc. The
salesperson had knowingly falsely assured her that the
car was in “tip-top condition…with just 45,000 miles
driven by only one previous owner.” Later in checking
official registration records, Cabrera discovered that the
sedan had three previous owners and that the odometer
had been set back from 70,000 miles. In court, Sharpe’s
attorney claims that under the parol evidence rule,
introduction of the salesperson’s oral statement is barred
because there ws an integration clause in the written
contract. Is this parol evidence admissible?
Parol evidence is admissible because it shows fraud.