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Legal Purpose and Proper Form
Chapter 10
Section 10-1
• Goals
– Identify various forms of illegal agreements.
– Distinguish agreements that, although illegal, the
courts will enforce.
Hot Debate page 168
• Where Sanford’s actions ethical?
• Would a statute that allowed “honest lotteries
for a good cause” be applicable? Why or why
not?
Illegal Activities
• Agreements that involve contracting for illegal
acts are generally unenforceable.
• However there are exceptions to this rule.
What’s Your Verdict page 169
• Were any of Razer’s agreements illegal?
Illegal Lotteries
• Most states forbid or regulate gambling.
• A non-regulated gambling agreement is an
illegal lottery.
Lotteries
• Lotteries have three elements:
– Prize (something of value for one or more
winners.)
– Chance (the winner is determined by luck.)
– Consideration (payment to participate)
Wager
• One of the most common forms of gambling.
• A wager is a bet on an uncertain outcome or
event.
Legal and regulated forms of
gambling.
• Casinos – a place where games of chance are used
to gamble.
• Pari-mutual betting – a form of gambling in
which those who bet on the winner of a horse race
share the total prize pool.
• State-run lotteries – like the PA lottery, scarily run
and managed by Gus the talking groundhog.
• Bingo games and pull-tab betting – permitted in
many states when conducted by licensed
institutions for financial charitable, religious, or
educational projects.
Economic Impact (Think Critically) on
page 169
• What’s your opinion of Native American tribes
raising revenue through casino gambling?
• Do you think the benefits of gambling, for
example increased tax dollars, outweigh the
negative impact gambling can have on a
community?
What do you think?
• How do we distinguish prohibited gambling
contracts from similar legal ones?
– For instance: Both betting on the horses and
investing in a start up company involves risk.
Agreements to pay Usurious Interest
• Almost all states provide that, with certain
exceptions, lenders of money may not charge
more than a specified maximum rate of
interest.
• For most states 18% is a common maximum.
• If not rate is specified the rate to be paid is the
legal rate of interest.
Agreements to pay Usurious Interest
• Many states allow licensed loan and
pawnbrokers to charge a small loan of interest
with a rate of typically up to 36% per year for
loans under $2,000.
• The theory is the loans are high risk with high
overhead for such small loans.
• These laws protect people from loan sharks.
What do you think?
• Terrance needs a loan of $750 to buy a new
bicycle. The bank will not give him the
money, either will any of his friends. So
Terrance goes to Parrish who offers to loan
him the money at 50% interest. Terrance pays
Parrish back the $750 but decided the 50%
interest was way “way way too high” and only
pays Parrish 15% in interest. Can Terrance do
that?
Agreements Involving Illegal
Discrimination
• Some agreements are illegal because they
illegal discriminate against people.
What do you think?
• Jones is a real estate agent. One of Jones clients
are the Rojewskis who recently emigrated from
Poland. Though the Rojewskis have a lot of
money, Jones keeps showing the Rojewskis cheap
housing where most Polish immigrants live in the
town, because as Jones puts it, “They would be
happier with their kind.” The Rojewskis get sick
of looking at the cheap condos and finally buy
one of the cheap condos that Jones is showing
them. Was what Jones did legal? Are the
Rojewski’s bound to the contract?
Agreements that Obstruct Legal
Procedures
• Agreements that delay or prevent justice are
void.
• Examples of such agreements are:
– Pay non-expert witness in a trial to testify, or pay
for false testimony.
– Bribe jurors.
– Refrain from informing on or prosecuting an
alleged crime in exchange for compensation.
• These are examples of compounding a crime.
Agreements Made Without Required
Competency License
• Competency license – all states require that
persons in certain occupations and business
pass exams to make sure they are competent in
their profession.
– People without a competency license may not
enforce the contracts they make in doing their
regulated work.
Revenue License
• Revenue License – a revenue license is a
license whose purpose is only to raise revenue.
• Contracts made by those who do not possesses
a revenue license and should are valid.
Think Critically Though Visuals page
170
• Who benefits from mandatory competency
licensing of trades people and professionals?
Analyze Real Cases page 186
• Question 27.
Agreements that Affect Marriage
Negatively
• Agreements that affect marriage negatively are
unenforceable.
• Examples:
– An agreement to marry for money so someone
could obtain citizenship.
– An agreement of forbearance of marriage.
Think Critically About Evidence page
185
• Questions 20 & 21.
Agreements that Restrain Trade
Unreasonably
• The U.S. economy is based on the concept of
free and open competition.
• The courts seek to prevent monopolies and
combinations that restrict competition
unreasonably.
Price Fixing
• Price fixing is when normally competing firms
agree on the same price to be charged for a
product or service.
• Price fixing is a crime under federal law.
Bid Rigging
• Bid rigging occurs when competitors who bid
on jobs agree that one bidder will have the
lowest bid for a particular job.
• Bid rigging is a form of price fixing.
Resale Price Maintenance
• Resale price maintenance is when
manufactures try to get retailers to sell their
products at a particular price. (aka that
suggested retail price)
• Manufactures may not contract with retailers
to sell the particular product at a set price.
• HOWEVER: Manufactures can refuse to sell
to retailers who will not charge the suggested
retail price.
Allocation of Markets
• Competitors may not divide markets between
themselves.
• Manufactures can sell to sell to only one
distributor in a given area, but that distributor
has to sell to anyone who travels from an
outside area.
Agreements Not to Compete
• Price fixing and market allocation are
agreements not to compete, and are not
enforceable.
• HOWEVER: Sometimes agreements not to
compete are enforceable.
Agreements Not to Compete
• Agreements not compete against an employer
once you are hired may be enforceable.
• However, an agreement to compete may
become unenforceable if they are unreasonable
in:
– Time period for the limitation.
– Geographic area to which the limitation applies.
– Employer’s interest is protected by the limitation.
Think Critically Through Visuals page
172
• Is this an legal agreement?
Assessment 10-1 (Part #1)
• Think Critically Through Legal Concepts.
– Questions 1 through 6 on page 174
• Think Critically About Evidence
– Questions 8, 9, & 12 on page 174
When Will The Courts Enforce Illegal
Agreements?
• Most illegal contracts are void.
• In some cases a party may receive restitution
(recovery of your consideration) or the
agreement to be enforced.
Protected Victims
• In some case the law that was violated was
designed to protect a party to the agreement.
• The “Blue-sky laws” prohibit the sales of
worthless stocks and bonds.
– The Blue-sky laws are named the blue-sky laws
because such worthless stocks and bonds have no
more value than the blue sky.
The Excusable Ignorant
• A person is considered excusable ignorant if:
– They do not know the contract is illegal but….
– The other party knows the transaction is illegal,
and
– The illegality is minor.
What’s Your Verdict page 172
• Can the Guptas recover their $25,000.00?
Rescission Prior to Illegal Act
• If a party rescinds before an illegal act occurs,
then restitution will be available.
Divisible Contracts
• Illegal contracts often contain a combination of
legal and illegal provisions.
• Courts may enforce the legal part of a contract
if it is divisible.
Divisible
• Divisible in a contact generally means that
separate consideration is given for the legal
and illegal parts of the contract.
Unconscionability
• Unconscionability occurs when there is a
grossly unfair contract that parties under
ordinary circumstances would not accept.
• The UCC governing the sale of goods makes
agreements or contract clauses that are
unconscionable unenforceable.
Procedural Unconscionability
• Procedural Unconscionability is shown how
the contract is created.
Substative Unconscionability
• Substative Unconscionability arises from
unfair terms in the agreement.
Assessment 10-1 (part 2)
• Think Critically Through Legal Concepts.
– Question 7 on page 174
• Think Critically About Evidence
– Questions 10, 11, & 13 on page 174
Section 10-2 statute of Frauds
• Goals
– Explain why the statute of Frauds in necessary and
what it requires.
– Distinguish agreements that, although illegal, the
courts will enforce.
What’s Your Verdict page 175
• Is Haka’s contract with Simon enforceable?
Why Have a statute of Frauds
• The law requires some contracts to be in
writing to be enforceable.
• This is because those contracts can be subject
to fraudulent claims.
• Most states determine what contracts must be
in writing which is covered under a law
entitled the statute of Frauds.
Contracts Within the statute of Frauds
• A contract is said to be within the statute of
Frauds if it is required to be in writing.
• If the contract is not required to be in writing it
is said to be without the statute of Frauds.
Contracts Within the statute of Frauds
• Contract to buy and sell goods for a price of $500
or more.
• Contracts to buy and sell real property or any
interest in real property.
• Contracts that require more than one year to
complete.
• Promises to pay the debt of answer for the legal
obligations of another person.
• Promises to give something of value in return for
a promise of marriage.
Contracts Within the State of Frauds
• Note: If a contract is within the statute of
Frauds, there is either no writing or no
signature, how courts will treat the parties
depends on the extent of contractual
performance.
Executed Contract
• An executed contract is one that has been fully
performed. (aka a contract where both parties
have fulfilled their promises.)
Executory Contract
• An executory contract is a contract that has not
been fully performed.
• NOTE: That an executory contract that falls
within the Statute of Frauds, but is not signed
or is not in writing, is unenforceable.
Executory Contracts
• Though like an illegal contract, an executory
contract in violation of the statute of Frauds is
unenforceable, there is a difference.
• Restitution is available for an injured party.
• If a benefit has conferred (transferred) in
reliance on an oral agreement, its value can be
recovered. (It is recovered by suing under a
quasi-contract)
Quasi-Contracts
• A quasi-contract exists when some element of
an enforceable contract is missing, yet courts
award money to prevent the unjust enrichment
of one party.
Requirement of the Writing
• States usually have two sets of requirement for
contracts in writing.
– The Uniform Commercial Code (UCC)
– The Statute of Frauds.
statutes of Frauds Requirements
• statutes of Frauds vary widely from state to state.
• Some states only require that there be a contract
in writing.
• Other states require:
–
–
–
–
–
–
Name of the parties
Subject matter description
Price
Quantity
Signature
Other essential items.
Think Critically Through Visuals page
176
• Write up a contract that contains all of the
essential terms required to create a valid offer
for one of the statutes.
• Assume that the sale is taking place in a state
that uses the most demanding statute of Frauds
standards.
UCC Requirements
• The UCC establishes a uniform content
standard.
• Under the UCC the writing in the contract
must indicate only:
– The quantity of goods.
– That a contract has been created between the
parties.
Special Rules for Signatures
• Under the statute of Frauds only the persons
who signed the contract may be sued for
enforcement.
– The signature may consist of any mark that is
intended as a signature or authentication of the
writing.
Special Rues for Signatures
• Under the UCC the rule is changed for those
who regularly deal in the type of goods being
sold in the contract.
• Under this rule a writing signed by one party
and sent to the other party is enforceable,
unless the other party objects within 10 days
upon receipt of the contract.
Contracts For The Sale Of Goods For
$500 Or More
• If the sale of goods is over $500 the contract
must be in writing.
Contracts For The Sale Of Goods For
$500 Or More
• The UCC provides exceptions to the $500 or more rule.
• In the following cases the contract under the UCC
writing and a signature is not required:
– When the goods are ordered to be specially manufactured
and they are not suitable to be sold to others in the ordinary
course of the seller’s business.
– When goods have been ordered and paid for and the seller
has accepted payment.
– When goods have been received and accepted by the buyer.
– When the party against whom enforcement is sought
admits during legal proceedings that that oral contract was
made.
Contracts To Sell An Interest In Real
Property
• Transfers of real property or leases of real
property (aka real estate) generally must be in
writing.
• Exceptions to this are:
– In most states oral leases of less than one year are
enforceable.
– If the seller has delivered the deed to the buyer.
– If the buyer has done all of the following:
• Made partial or full payment.
• Occupied the land.
• Made substantial improvements to the land.
Think Critically Through Visuals page
177
• How do the statute of Frauds requirements for
signatures differ from the UCC requirements?
Contracts That Require More Than
One Year To Complete
• Courts will not enforce a contract that cannot
be performed within one year unless there is a
signed writing to prove the agreement.
– The year begins when the contract is made, not
when performance is set to begin.
Contracts That Require More Than
One Year To Complete
• NOTE: The test is not that the agreement is
actually performed in one year, just that it can
be performed within one year.
What’s Your Verdict page 177
• Are they legally bound to remain partners in
business until one of them dies?
Contracts To Pay A Debt Or Answer
For Another’s Debt
• If you promise to pay a debt or a default of
someone else it must be in writing.
• Collateral promise - when you promise to pay
if someone defaults on a loan. (for instance if
you cosign for a loan)
• Primary promise – when you promise to pay
for the debt of another.
Main Purpose Rule
• HOWEVER: there is an exception to the rule:
– Main purpose rule – a third party is liable for an
oral promise to pay another’s debt if the main
purpose of the promise serves the promisor’s own
interest.
Analyze Real Cases page 186
• Question 30.
Contract For Which Consideration Is
Marriage
• A signed writing is required for agreements in
which one party promises to marry. (This
covers dowrys, promises to deed houses,
etc…)
Think Critically About Evidence page
185
• Questions 23 & 24.
Acknowledgement of Final Agreement
• Sometimes conversations preceding the
contract are not reflected in the contract itself.
• Therefore, most written contracts will have a
clause in them stating that the written contract
is the entire contract.
– This prevents confusion later on.
Specific Rules of Interpretation.
• If a contract comes into dispute the courts
look for specific things within the contract and
about the agreement in general.
Analysis
• The courts will look for the parties’ original
intent upon entering into the contract.
• Basically asking what was the purpose of the
contract in the first place?
Conflicting Terms in the Contract
• Sometimes in contracts the terms may conflict
with each other. For instance.
– If there is typewritten text and handwritten text
inserted into the contract the courts will usually
enforce the handwritten text. (The theory is the
handwritten text was probably added after the
Typewritten) Text.
Conflicting Terms in the Contract
• Sometimes in contracts the terms may conflict
with each other. For instance.
– If there is a number written and spelled out, which
conflict; the courts will enforce the less ambiguous
text. Example $2,500 and “Twenty hundred, five
hundred”.
What do You Think?
• Look at and read the real estate mortgage
agreement on page 182.
• What are the conflicting numbers on this
agreement and which numbers would the
courts enforce?
Words
• Usually the plain and ordinary meanings of
words are used to interpret the meanings of the
words in contracts. HOWEVER:
• Legal and technical terms are given their
technical meaning unless the contract as a
whole shows that a different meaning is
intended.
• ALSO, prior relationships of the parties may
indicate how the words should be interpreted.
Ambiguities
• Courts will often interpret ambiguities against
the party who drafted the contract.
Ambiguities
• Sometimes the consumer is asked to accept
and sign a “take it or leave it” contract.
• Since these contracts are viewed as being
prepared by the stronger parties (usually sellers
with resources such as lawyers) they generally
favor the stronger party.
• As such the courts usually favor against the
stronger party.
Assessment 10-2 (part 2) page 183
• Think Critically About Evidence
– Question 6
Implied Reasonableness
• Contracts often include implied terms as a
matter of reasonableness.
• Promised services must be performed with
reasonable care and skill even when this is not
stated in the contract.
Think Critically Through Visuals page
180
• What can you do to protect yourself against
contract terms that strongly favor the interests
of the offering parties?
The Parole Evidence Rule
• Generally conversation before signing of the
contract is not admissible in court as evidence
about the contract.
– The courts assume the written contract is full and
complete, explaining both parties’ intentions.
Parole Evidence
• Parole Evidence – consists of words
spoken prior to the execution of the final
writing or at the time of signing.
Exceptions to the Parole Evidence
Rule
• To clarify ambiguities in the written
contract.
• If the written contract was not intended to
be a complete agreement.
• If a condition necessary to the existence
of the contract never occurred.
Even More Exceptions to the Parole
Evidence Rule
• If fraud, illegality, mistake, or
misrepresentation occurred.
• To show the parties reached agreement or
terminated the contract under consideration
after executing the written contract.
• To show that the contract is voidable because a
party lacked contractual capacity.
Think Critically Through Visuals page
182
• Stan and Lauretta attended an open house for a
home they are interested in buying. They tell the
agent that they would be serious about buying this
house if the owner would remove some of the
bushes in front of the house. The salesperson says
that would not be a problem. Later they sign a
contract to buy the house, but it doesn’t mention
removing the bushes. If the couple later sued to
make the homeowners remove the bushes, would
they win the case? Why or why not?
What’s Your Verdict page 179 (yes
waaaayyy back on page 179)
• Can Highman recover the refund? Why or
why not?
Assessment 10-2 (part 3) page 183
• Think About Legal Concepts
– Questions 1 though 4
• Think Critically About Evidence
– Questions 5 and 7
Think Critically About Evidence page
185
• Questions 22 and 24
Analyze Real Cases Page 188
• Questions 26, 28, and 29
Sports and Entertainment Law
• Copolla vs. Warner Brothers
– Should the contract have been under the Statute of
Frauds? Why or Why not?
– Should the punitive damages awarded have been
allowed? Why or Why not?