Transcript Chapter 1

Chapter 9
Unlawful Agreements and the
Statute of Frauds
I. Unlawful
Agreements
An Unlawful Agreement
is one that is:
1.
Contrary to an expressed provision of
law;
2.
Contrary to the policy of expressed law,
though not expressly prohibited; or,
3.
Otherwise contrary to good morals
[CC§ 1667]
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PUBLIC POLICY means the common views about
what is best for the public welfare
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If the object of the contract is unlawful, the contract is
void (technically, since the object is unlawful, there is
no contract) [CC§ 1598]
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Equal guilt in a contract is referred to as in “pari
delicto.”
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Although there may be a technical difference, we will
consider the term “unlawful” and “illegal” to be
synonymous
II. Wagers
 Gambling
 Lotteries
A. Gambling

The general rule is that a court will not recognize a
gambling contract and will not aid the parties, but
will leave the parties in the position where it finds
them

Each state’s legislature has the discretion to
determine which laws are passed, including certain
types of gambling. For example, certain types of
gambling are legal in Nevada, but NOT in
California.
B. Lotteries

A LOTTERY involves three elements: the payment
of valuable consideration, for the chance, of
winning a prize.
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When does a raffle become a lottery?
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If there is:
1.
2.
3.
a prize
chance, and
consideration
III. Usury
 Loan or Forbearance
 The Credit Sale
 Penalties For Usurious Rate
 Criminal Penalties
A. Loan or Forbearance

A forbearance occurs when a person’s debt has
become due and the creditor agrees to wait for
payment beyond the due date, with the debtor and
creditor agreeing that the debtor will pay interest
for the period of time the creditor waits

If the amount was not agreed to, it is 7%. The
parties can agree in writing to a higher rate, but
how much higher?
2 Classes of Loans

The first class contains loans primarily for personal,
family or household purposes referred to as
CONSUMER LOANS

NON-CONSUMER LOANS are the second
classification for loans for all purposes other than
consumer transactions

The state of California has determined what is a fair
rate of return on a loan of money, and any amount
over this fair rate of return would be considered
unfair and unlawful (USURY)
B. The Credit Sale

When a buyer finances the purchase of real property
or personal property by making payments, this credit
sale is not a loan of money or a forbearance of
money and the usury law does not apply
C. Penalties For A
Usurious Rate

If a loan is usurious, the lender usually has the right to collect the
principal amount of the loan but is NOT allowed to collect the
interest

In a loan containing a usurious rate of interest, the payment of
interest is “null and void” [Civil Code Section 1916-2]

If the usurious interest rate has been collected by the lenders, the
borrower may recover three times the amount of the usurious
interest paid within the previous year
[CC§ 1916-3(a)]

The Statute of Limitations to recover the triple interest paid requires
an action be brought within one year from the date of payment of
the usurious interest
D. Criminal Penalties

If a lender willfully received usurious interest, it
would be guilty of loan sharking, which is a felony
punishable by imprisonment in state prison for not
more than 5 years, or in the county jail for not
more than 1 year [CC§ 1916-3(b)]
IV. Promises Not
To Compete
Promises Not To Compete

“Promises NOT to compete” by employees are not looked
upon favorably in California

“Every contract by which anyone is restrained from
engaging in a lawful profession, trade, or business of any
kind is to that extent void”
[Bus. & Prof. C.§ 16600]
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TERRITORIAL RESTRICTION
TIME RESTRCTION
TRADE SECRET
V. Licensing Statutes
A. Business or Regulatory
License
1. BUSINESS LICENSE is a tax on businesses at that
location designed to raise public revenue
2. REGULATORY LICENSE is designed to protect the
public from unqualified or incompetent individuals
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Real estate brokers
Contractors
Architects
Accountants
Cosmetologists
VI. Exculpatory
Agreements
 Releases
Exculpatory Agreements
are used when one party to a contract does not wish
to shoulder certain risks inherent in the subject
matter of the contract and desires to shift those
risks to the other contracting party

If a business is involved in serving the public
interest, that business will not be allowed to
enforce an exculpatory agreement with members
of the public
VII. When Contracts Have
to Be in Writing:
The Statute of Frauds
Statute of Frauds

The purpose of which is to insure that a fraud will
not be committed on the court by having either a
plaintiff or defendant lie about the existence or
nonexistence of a contract and dupe the court
into believing their position

The Statute of Frauds is always used as an
AFFIRMATIVE DEFENSE by the defendant
A. Performance Longer
Than 1 year

“An agreement that by its terms is not to be
performed within 1 year from the making thereof”
is required by the statute of frauds to be in
writing and signed by the defendant in order to
be enforced in court [CC§ 1624 (a)]
B. Promise to Pay the
Debt of Another

“A special promise to answer for the debt, default,
or miscarriage of another,…” with few exceptions
must be in writing and signed to be enforceable in
court [ CC§ 1624 (b)]
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MAIN PURPOSE RULE
C. Real Estate Transactions
 Contracts for the sale of real property, or an interest
therein, as well as leases over one year, must be in a
signed writing to be enforced in court
[CC§ 1624 (a)(3), CCP§ 1971]
 An INTEREST THEREIN includes easements or
restrictions on the use of the land, and agreements
for gas, oil, or mineral leases
D. Real Estate Agent’s
Commission

Employment of a real estate broker to
purchase or sell real estate or lease real estate
for a period longer than one year must be in a
signed writing for the broker to get paid
[CC§ 1624 (a)(4)]
E. Performance
Beyond a Lifetime

A writing is also required for “an agreement that
by its terms is not to be performed during the
lifetime of the promisor” [CC§ 1624 (a)(5)]
F. Assumption of A Debt on
Real Property
 An agreement by a purchaser of real property to pay
an indebtedness secured by the property purchased
must be in writing to be enforced [CC§ 1624 (a)(6)]
G. Loans Greater than $100,000

Loans greater than $100,000 not primarily for personal,
family, or household purposes, come under the writing
requirement of the statute of frauds if made by a lender in
the credit business
[CC§ 1624 (a)(7)]
H. When the Statute of Frauds is
NOT Applicable
1.
Full Performance
2.
Part Performance
3.
Promissory Estoppel
4.
Defendant Admits
I. Sufficiency of the Writing
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The minimum requirements for the writing:
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Identification of each party
Reasonable identification of the subject matter
Essential terms and conditions of each party’s
performance obligation
Signature of each party
Technically, it is not necessary that the writing
be signed by the plaintiff
J. Sale of Goods

“A contract for the sale of goods for the price of $500
or more is not enforceable by way of action or
defense unless there is some writing sufficient to
indicate that a contract for sale has been made
between the parties and signed by the party against
whom enforcement is sought…” [UCC§ 2201(1)]

Exceptions:
1.
2.
3.
4.
Confirmation Letter
Specially Manufactured Goods
Part Performance
Admission
K. Probate Payments
 A personal representative’s promise to pay a debt of
a decedent out of the representative’s own funds is
unenforceable unless it is in writing and signed by
the representative [Probate C.§ 9604]
L. Marriage Agreements

“A premarital agreement shall be in writing and
signed by both parties. It is enforceable without
consideration” [Family C.§ 1611]
Chapter Summary
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
Unlawful Agreements

Exculpatory Agreements

When Contracts Have to Be in
Writing: The Statute of Frauds
Wagers
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Gambling
Lotteries
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Usury
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Loan or Forbearance
The Credit Sale
Penalties for Usurious Rate
Criminal Penalties
Promises Not To Compete
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Licensing Statutes
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Business or Regulatory Licenses
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Performance more 1yr
Promise to pay debt of another
Real estate transactions
Real estate agent’s compensation
Performance beyond lifetime
Assumption of a debt on real property
Loans greater than $100,000
When Statute of Frauds doesn’t apply
Sufficiency of the writing
Sale of goods
Probate payments
Marriage agreements