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Chapter 15 - Illegality
CHAPTER 15
ILLEGALITY
LEARNING HINTS
1. When an agreement involves an act or promise that violates some law or violates public
policy, the public interests threatened by the agreement outweigh the interests that favor its
enforcement. A court will not enforce the agreement on the grounds of illegality, even if the
parties had capacity (in other words, they freely and voluntarily entered into it).
2. Some very interesting cases involve the question of whether a contract is illegal and
unenforceable for public policy reasons. For example, should a person be able to sell body parts
just as she can sell her blood? (Note: Many laws prohibit such sales.) What are the public
policy issues involved here? Who should make this decision--the courts or the legislature?
3. If someone attempts to enforce a contract but that person is not licensed by a state to perform
the work that is the subject of the contract, enforcement depends upon whether the purpose of the
licensing statute primarily is regulatory (that is, to protect the public against dishonest or
incompetent practitioners) or a revenue-raising measure. Does this distinction make sense?
4. Non-competition clauses are common in some kinds of employment contracts, such as those
involving the employment of licensed professionals. Courts will generally enforce such a clause
if it serves a legitimate business purpose, the restriction is reasonable in time, geographic area
and scope, the clause does not impose an undue hardship.
5. A noncompete clause in a contract involving the sale of a business is generally not viewed
with as strict a standard as noncompete clauses in employment contracts. Why?
6. A release may be unenforceable if it violates public policy. However, there are also reasons to
protect the right of a party to include a release or exculpatory clause in the contract. For
example, many ski resorts include such a statement in renting equipment and ticketing use of the
slopes. Courts in states where skiing is a popular sport have enforced such releases; otherwise,
the cost of insurance and cost of skiing could increase dramatically. Note that the release would
not bar recovery in cases of reckless or intentional torts. Why are exculpatory clauses involving
mere negligence treated more favorably than those involving reckless or intentional torts?
7. How would you define the term public policy?
8. Describe the doctrine of unconscionability.
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Chapter 15 - Illegality
CHAPTER OUTLINE AND KEY CONCEPTS
I. Learning Objectives
II. Meaning of Illegality
A.
Determining Whether an Agreement Is Illegal
1. Illegal agreements are classified into three main categories: agreements that
violate statutes; agreements that violate public policy; and unconscionable
agreements and contracts of adhesion
2. Example: Coma Corporation v. Kansas Department of Labor, 154 P.3d 1080
(Kan. Sup. Ct. 2007)
III. Agreements in Violation of Statute
A. Agreements Declared Illegal by Statute
1. Usury statutes
2. Wagering or gambling statutes
B. Agreements that Violate the Public Policy of a Statute
1. Agreements to Commit a Crime
2. Agreements that Promote Violations of Statutes
3. Licensing Laws: Agreement to Perform an Act for Which a Party Is Not
Properly Licensed
a. Regulatory or revenue-raising?
b. Example: Riggs v. Woman to Woman, P.C., 812 N.E. 2d 1027 (Ill. Ct.
App. 2004)
IV. Agreements That May Be in Violation of Public Policy Articulated by Courts
A. Agreements in Restraint of Competition
1. Understand the difference between a contract clause known as a
noncompetition or noncompete clause that has the sole purpose of restraining
competition and one that is only part of or ancillary to an otherwise legal
contract
2. Enforceability of Non-Competition Clauses
a. Courts will enforce if three criteria are met:
(1) Clause must serve a legitimate business purpose;
(2) The restriction on competition must be reasonable in time,
geographic area, and scope; and
(3) The noncompetition clause should not impose an undue
hardship.
3. Noncompetition Clauses in Employment Contracts
a. Distinguish a noncompetition clause from both a nondisclosure
agreement (also known as a confidentiality agreement) and a nonsolicitation agreement.
b. Example: Nasc Services, Inc. v. Jervis, 2008 U.S. Dist. LEXIS 40502
(U.S. Dist. Ct. D. N.J. 2008)
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Chapter 15 - Illegality
4. The Effect of Overly Broad Noncompetition Clauses
B. Exculpatory Clauses
1. Release from liability or waiver of liability from torts, to the benefit of one
party
2. Exculpatory clauses cannot protect a party from more than negligence; cannot
exclude tort liability for someone who owes a duty to the public; and cannot
avoid obligations imposed by statute, like workers’ compensation statutes
3. Example: Marcinczyk v. State of New Jersey Polic Training
Commission, 5 A.3d 785 (Sup. Ct. N.J.
4. If the exculpatory clause is unconscionable or a contract of adhesion, a court
may not enforce it
C. Family Relationships and Public Policy
V. Unfairness in Agreements: Contracts of Adhesion and Unconscionable Contracts
A. Unconscionability
1. Consequences of Unconscionability
2. Meaning of Unconscionability
a. Unconscionability – absence of meaningful choice with terms
unreasonably advantageous to one of the parties
b. Distinguish between procedural and substantive unconscionabilty.
c. Example of unconscionability analysis: Moore v. Woman to Woman
Obstetrics & Gynecology, 3 A.3d 535 (N.J. Super. Ct. 2010)
B. Contracts of Adhesion
1. Contracts in which the stronger party is able to determine the terms of the
contract, leaving the weaker party no practical choice but to “adhere” to the
terms.
2. Under what circumstances are these types of contract unenforceabe?
VI. Effect of Illegality
A. General Rule: No Remedy for Breach of Illegal Agreements
B. Exceptions
1. Excusable Ignorance of Facts or Legislation
2. Rights of Parties Not Equally in the Wrong
3. Rescission before Performance of Illegal Act
4. Divisible Contracts
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