CHAPTER

10

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

FOCUS Identify types of contracts that society, through its courts of law, should not enforce even though all the essential elements for an enforceable contract are present.

WHICH AGREEMENTS ARE ILLEGAL?

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?

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.

Agreements involving illegal discrimination 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?

Agreements made without a required competency license –

– Competency license - persons need in certain occupations. Persons who lack the required competency license may not enforce the contracts they make in doing the regulated work.

Agreements that affect marriage negatively

WHICH AGREEMENTS ARE ILLEGAL?

Agreements that restrain trade unreasonably – US economic system based on free and open competition. – Price fixing – crime under federal law. Agreements to fix prices are therefore unenforceable. When competing firms agree on the same price to be charged for a product.

bid rigging – occurs when competitors who bid on jobs agree that one bidder will have the lowest bid for a particular job. They take turns being the 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.)

Questions

Razer agreed with several published articles that criticized laws prohibiting the production, possession, and use of marijuana. The authors of the articles claimed such legislation was unrealistic and often violated civil rights. Razer agreed so heartily that he bought several dozen marijuana plants from a friend, Sara. Then he rented a patch of isolated land and persuaded the owner, Tom to accept a share of the proceeds from the sale of the anticipated crop as rent. After harvesting the first crop, Razer sold most of the product to a local drug dealer for $7500. Were any of Razer’s agreement illegal?

All of the agreements were criminal and therefore void.

Agreements not to compete?

– Allocation of markets – when competitors divide markets between themselves. – Agreements not to compete – are illegal except when persons are hired they have a non-compete clause. They become illegal if unreasonable: Time period for the limitation Geographic area employer’s interest protected by the limitation

Name four of the eight illegal agreements discussed in this section.

Illegal lotteries, usurious loans, discriminatory agreements, agreements that obstruct legal procedures, agreements made without a competency license, agreements that affect marriage negatively, agreements that restrain trade unreasonably, agreements not to compete.

WHEN WILL THE COURTS ENFORCE ILLEGAL AGREEMENTS?

Most illegal contracts are void and unenforceable. Except when connection between illegality and the agreement is small or there is an innocent party. In these cases restitution is allowed.

– Restitution – recovery of consideration 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.

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?

Rescission prior to illegal act – if a party rescinds before the illegal act occurs, then restitution will be available.

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.

Divisible – means that separate consideration is given for the legal and illegal parts Unconscionability – UCC governing the sale of goods makes these. This occurs when there is a grossly unfair contract that parties under ordinary circumstances would not accept. These are illegal – 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 unconscionability before the contract is deemed unconscionable and illegal.

– Courts can refuse to enforce, enforce parts or modify the terms of an agreement ruled unconscionable.

Questions

A young couple, the Guptas, wanted to provide for the college education of their infant daughter. They received this offer in the mail from the True Bonanza Mining Corp., which seemed perfect for their need. “Join us now for only 10 cents a share of stock. Become part owner of a gold and silver mine with already proven mineral deposits. In ten years, you will be rich enough to retire.” The Gupta used all their savings to buy 250,000 shares of Bonanza stock. Months later they learned that Bonanza had violated the law. It’s “proven mineral deposits’ were commercially worthless aluminum oxide. The sales agreement was illegal. Can the Guptas recover their $25,000?

Blue sky laws prohibit sales of worthless stocks and bonds. The Guptas would have restitution to recover money.

Under what circumstances will the courts enforce illegal agreements?

The courts will do so in order to help relatively innocent or ignorant parties out of their bad bargains.

Questions

Crump was coming up for trial on felony charges. He paid the judge in the case $10,000 to make errors in conducting the trial so that crump’s conviction could be over turned on appeal. When the appeal failed, Crump sought to sue for restitution of the $10,000. Should he be allowed to recover the bribe? Why or Why not?

No. However, the two are not of equal guilt (in pari delicto)

Questions

Dixon, a wholesaler, was on the brink of bankruptcy. He bought fire insurance policies for more than twice the value of the. building and contents from two companies. Then he arranged to pay a character know only as “Sparky” $5000 to “torch” his business building. If Sparky did so but Dixon did not pay him, could Sparky enforce the contract for $5000? Could Dixon legally collect on his insurance policies if Sparky torched the building?

No. The agreement with Sparky was void because it was a contract to commit a crime. No, Dixon could not recover the insurance money because he would have committed a crime in causing the burning of the insured buildings.

Questions

A new boss was scheduled to take over Patty’s department in three weeks. Patty agreed to pay Nancy $600 to remove unflattering information from her personnel file so she would look good to the new boss. The day before Nance was going to do it, Patty called and told her not to. She also asked for her money back. Nancy never took the information. Could Patty sue and recover her money?

If Patty had paid, she could recover her money because she rescinded before the illegal act.

Questions

Cliff worked as a site manager for an oil-drilling company. When a drill bit broke, he called Texas Bit Company, a bit manufacturer. Cliff asked for a bit able to cut quickly through granite. The salesperson recommended their model 2123 which was described as a high carbon steel bit with diamonds embedded on the cutting edges. The salesperson quoted a fair price but she said there were no warranties and that the product was being sold, “as is.” This is an unusual practice in this industry. Cliff didn’t think he could get that type of bit from anyone else without a big delay so he ordered it. It turned out that the bit was made only of low-carbon steel and it cut very slowly. Is there procedural unconscionability here? Is there substantive unconscionability here? Did the bit company create an unconscionable contract?

Yes, there is procedural unconscionability in the misrepresentation about the drill bit’s carbon content and yes there is substantive unconscionability in the requirement that the bit be sold “as is”. Therefore the contract is illegal.

Questions

A remote community and the surrounding countryside had no doctor. The city council advertised for help, offering free office space, a six-bed infirmary, and a three year contract. Glamorgan applied and was accepted. Three months later, the council learned that although Glamorgan had a medical degree, she had failed to pass the state examination required to practice medicine. No patients complained, but the council summarily discharged her. Glamorgan sued for breach of contract. Will she win the lawsuit?

No, Glamorgan will lose because she does not have the required competency license

Questions

Randy entered into a contract to provide a computer program to a New Jersey school district. He used without permission parts of a computer program copyrighted by another programmer. The portion of the program that violated the copyright law cost $12,000 and the part that didn’t violated the copyright law cost $44,000. he delivered both parts to the school district. Can he recover anything for his work?

If the contract is divisible he can collect $44,000

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 to buy and sell goods for a price of $500 or more.

Buy/sell real property Contracts require more than 1 year to complete Payment of debt/obligation of another Promises to give something of value in return for a promise of marriage.

– 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 have these as unenforceable and 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. Requirements of the writing (You call and order a pizza to be delivered.)

Questions

While they were playing golf, Haka orally agreed to buy an apartment building from Simon. In a later telephone conversation, Haka promised Simon $100,000 as a down payment on the purchase price with the balance to be paid within five years. Simon promised to deliver the deed to the property at the time the down payment was made. Both parties were satisfied that all the terms had been completely negotiated. Later Haka found a better deal and told Simon he was backing out. Is Haka’s contract with Simon enforceable?

This was a transfer of real property and therefore needed to be in writing. This oral agreement would not be enforceable in court.

Requirements of the Writing

Requirements vary for state to state.

– Statute of Frauds requirements – vary from state to state. Some 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.

– 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 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. Needs to be in writing.

– Primary promise: promise of payment for self. Does not have to be in writing – Exception— main purpose rule own interest) (promise serves the promisor’s 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.

Questions

Cervante and Joan were good friends. When they graduated from high school, bother were 18. They planned to marry, but first they wanted to become financially secure. So they shook hands and agreed to become partners in operating a small restaurant serving Indian cuisine. “This just beginning” Joan said. “I’ll death do us part” both said. Are they legally bound to remain partners in business until one of them dies?

This does not need to be in writing because it can be completed within one year (unknown). Missing essential elements such as defined time period. Either party can withdraw at any time.

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 time is allowed. – when no time stated for performance a reasonable

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.

– Exception to the parol evidence rule 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.

Questions

Jason’s father, Phil died. He left credit card bills totaling $17,000 and some additional small bills. His only asset at the time of death was a savings account with $6,000 in it. One of the credit card companies called Jason. In his grief, Jason orally promised to pay them the balance of his dad’s account $2,000. Is this promise enforceable in court?

No, this oral promise to pay the debt of the father is not enforceable, if Jason was going to pay with his own money.

Questions

A salesperson tries to persuade you to buy an electonic, musical instrument. The price is $499, plus carrying charges of $72. The sales person says’, “You’ll soon be the life of the party. If not, just return it and get your money back.” You sign an installment payment contract, which includes or integration clause but which says nothing about a return privilege. Can you hold the seller to the promise to accept to return?

No, the parol evidence rule will bar testimony about the prior and statements regarding written policy.

Questions

Under a written contract, Cabrera bought a used sedan from Sharpe’s Previously Owned Cars, Inc. The salesperson had knowingly falsely assured her that the car was in “tip-top condition…with just 45,000 miles driven by only one previous owner.” Later in checking official registration records, Cabrera discovered that the sedan had three previous owners and that the odometer had been set back from 70,000 miles. In court, Sharpe’s attorney claims that under the parol evidence rule, introduction of the salesperson’s oral statement is barred because there ws an integration clause in the written contract. Is this parol evidence admissible?

Parol evidence is admissible because it shows fraud.