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
WHICH AGREEMENTS ARE ILLEGAL?
1. 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?
2. 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.
3. Agreements involving illegal discrimination
4. 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?
5. Agreements made without a required
competency license –
– Competency license - Persons who lack the required
competency license may not enforce the contracts
they make in doing the regulated work. Doctors,
Lawyers, Teachers, Pharmacists. Also real estate
brokers, insurance agents, and building contracts are
subject
6. Agreements that affect marriage
negatively
(paying NOT to marry)
WHICH AGREEMENTS ARE ILLEGAL?
7. Agreements that restrain trade unreasonably –
US economic system based on free and open
competition.
– Price fixing – Federal Crime. Agreements to fix prices
are unenforceable. (you charge $5 for gas, I will too!)
bid rigging – occurs when competitors who bid on
jobs agree that one will have the lowest bid for a
particular job. They take turns being 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.)
Agreements not to compete?
– Allocation of markets – i.e. Ford won’t
sell outside the U.S.
– Agreements not to compete – price
fix/allocation of markets are examples.
However, this can be LEGAL if YOU are hired
by a firm, and agree NOT TO COMPETE if
you quit for a reasonable time (i.e. hair
dresser, specific business type in same city,
etc.)
WHEN WILL THE COURTS
ENFORCE ILLEGAL AGREEMENTS?
1. 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.
2. 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?
3. Rescission prior to illegal act – if a party
rescinds before the illegal act occurs, then
restitution will be available. (you pay someone $50
to steal final exam, but call it off before, could get
money back).
4. 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.
What is Unconscionability??
Unconscionability -- Occurs when there is a
grossly unfair contract that parties under
ordinary circumstances would not accept.
– 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
involved
– Courts can refuse to enforce, enforce parts or modify
the terms of an agreement ruled unconscionable.
Unconscionable Group Activity!!
Divide into groups
Problem: Welfare recipient, with 4th gr.
Education agrees to purchase a
refrigerator for $2,300. Two-year loan
contract with high, but legal interest
rate. Same fridge usually sells for
$500.
Is this unconscionable?? Why/Why Not??
Complete 10-1 Cases!
In your groups, read and talk about cases
on handout
Be ready to discuss!
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 for
Marriage
 Contracts that are more than a Year
 Contracts for sale of Land
 Executor who promises to pay the debts of
another
 Sale of Goods $500 or more
What a Contract is NOT in Writing??
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 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. (You call and order
a pizza to be delivered.)
Requirements of the Writing
Requirements vary for state to state
(Alaska here!).
– Some states 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.
Requirements of the Writing (cont.)
– 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 (bill of sale)
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.
– 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)
“I promise to pay your rent if you can’t.”
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.
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.
– EXCEPTIONS!!
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.
STATUTE OF FRAUDS SONG!!
Complete 10-2 Cases!
In your groups, read and talk about cases
on handout
Be ready to discuss!