Twomey  Jennings
Anderson’s Business Law and the Legal Environment, Comprehensive 20e
Anderson’s Business Law and the Legal Environment, Standard 20e
Business Law: Principles for Today’s Commercial Environment 2e
Chapter 16
Contracts: Legality
and Public Policy
Copyright © 2008 by West Legal Studies in Business
A Division of Thomson Learning
Effect of Illegality
• Illegality embraces situations in which a
statute declares that certain conduct is
unlawful or a crime:
– contracts requiring the commission of a
tort.
– contracts that are contrary to public policy.
– contracts that are unconscionable.
– to some extent, contracts that are
oppressive, unfair, or made in bad faith.
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Effect of Illegality
• When an agreement is illegal, it is
ordinarily void, and no contract arises
from it.
• Courts will not allow one party to an
illegal agreement to bring suit against the
other party.
• There are some exceptions to this, such as
when the parties are not equally guilty or
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when the law’s purpose in making the
Copyright © 2008 by West Legal Studies in Business
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Exceptions to Illegality
• Protection of One Party.
• Unequal Guilt.
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Good Faith and Fairness
• Good Faith and Fairness.
– Every contract has an implied duty of good
faith and fair dealing.
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Unconscionable Clauses
•
•
•
•
What constitutes unconscionability?
Procedural unconscionability.
Contracts of Adhesion.
Substantive unconscionability.
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Exceptions to Effect of
Illegality
Protectio
n of
One
Party
Society,
speaking through
Relief
Relief
lawmakers or judges,
deems voiding illegal contract
unjust when the party meant to be
protected is harmed or harshly treated.
Unequal
Guilt
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Relief
Knowledg
e of Illegal
Purpose of
Other
Party
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Agreements Affecting
Public Welfare
• The legality of an agreement is
considered in light of the effect on the
rest of society.
• Whether a contract is contrary to
public policy may be difficult to
determine because public policy is not
precisely defined.
– That which is harmful to the public welfare
or general good is contrary to public policy. 8
Copyright © 2008 by West Legal Studies in Business
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Agreements Affecting
Public Welfare
Illegal Wagers
and Lotteries
Illegal
Discrimination
Prejudice to
Public Policy
Agreements
Negatively
Affecting
Society
Obstructions to
Legal Process
Evasions of
Statutory
Protection
Injuries to
Public
Service
Illegal
Lobbying
Conflicts of
Interests
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Examples of Illegal
Agreements
• Agreements injuring public service,
such as an agreement to buy a
government job for an applicant.
• Agreements involving conflicts of
interest, such as when the purchasing
officer of a government buys from a
company that the officer privately
owns.
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Examples of Illegal
Agreements
• Agreements obstructing legal process,
such as an agreement with a witness
to disappear.
• Illegal discrimination contracts.
• Wagers and private lotteries.
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Regulation of Business
Contracts with Unlicensed
Persons in Licensed Callings
or Dealings
Fraudulent Sales
Usurious
Agreements
Agreements
Impacting
Business
Obstructions to
Legal Process
Conflicts of
Interests
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Agreements
Restraining
Trade
Agreements
Not to
Compete
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Agreements Not to Compete
• Contracts in restraint of trade are generally
illegal as violating federal or state antitrust laws.
• Non-compete Agreements are illegal unless the
terms are reasonable and it is incidental to the
sale of a business or to a contract of
employment.
– Sale of Business.
– Employment Contract.
– Effect of Invalidity.
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Usurious Agreements
• The charging by a lender of a higher rate of
interest than allowed by law is usury.
• Courts must examine transactions carefully
to see if there is a usurious loan disguised as
a legitimate transaction.
• When sellers of goods offer their buyers one
price for a cash sale and another, higher
price for a credit sale, the higher price is
lawful in most cases.
Copyright © 2008 by West Legal Studies in Business
A Division of Thomson Learning
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