LEGALITY
CHP. 10
Chapter Overview
A contract can be made illegal in several ways. A contract may involve something that violates statutory law, either civilly or criminally. Sometimes making the agreement itself can be illegal. When someone agrees to commit crimes for a promised consideration, he or she is involved in conspiracy, which is illegal. Other agreements are illegal because they violate public policy. In this chapter, you will be able to avoid problems that you might encounter when entering into a contract.
Six Required Elements of a Contract
- OFFER
- ACCEPTANCE
- GENUINE AGREEMENT
- LEGALITY
- CAPACITY
- CONSIDERATION
Agreements that Violate Statutes
If any part of an agreement is illegal, the contract is void. Sometimes a part of the contract is valid and is said to be divisible. The court may enforce that part of the contract.
If both parties knew it was illegal the court will not aid either party. If one of the parties is innocent the court may help them recover their money or property.
VIOLATING CIVIL AND CRIMINAL STATUTES
Agreements that require one party to commit a tort or a crime are illegal.
An agreement is illegal if
~it’s made to interfere with or violate the rights of another person
~it protects one party from the consequences of torts or crimes committed …both parties would be liable for their illegal acts
USURY STATUTES
Usury - charging more than the maximum legal interest rate
- Ohio has a usury cap for personal loans of 26%; 8% for home loans over $100,000
An agreement in which a borrower agrees to pay more that the maximum legal interest rate would be illegal and not enforced by the courts (void).
GAMBLING STATUTES
Ohio gambling laws allow for wagering on horse racing, as well as gambling at casinos. Also, the state allows certain charitable and non-profit organizations to engage in limited gambling for fundraising efforts, such as raffles and bingo. However, bookmaking -- the process of placing bets on sporting events or other contests -- is illegal in Ohio. This is expected to change soon.
Example: If you bet on the Super Bowl and win but the person you made the bet with does not pay you, you cannot sue. Your agreement is invalid because it is illegal.
Private, social gambling allowed
LICENSING STATUTES
All states have statutes that require persons to have a license to practice certain trades or professions These laws are in place to protect you from dealing with unqualified persons.
Examples of trades/professions that need a license:
- teacher
- lawyer
- doctor
- electrician
- plumber
- hair stylist
If you hire an unlicensed plumber to fix a leak in your house and he/she does an awful job, you cannot sue that person because they are unlicensed. The agreement is illegal.
Agreements Contrary to Public Policy
Some agreements are illegal because they violate a legal doctrine known as public policy.
Remember, the government is thinking of the greatest good principle when applying public policy doctrines. Decisions are made based on whether a policy will create the greatest good for the greatest number of people…every action has the potential to affect other people.
The ability to regulate the health, safety, welfare and morals of the public is a power that belongs to the government.
No one should be able to do anything that harms the public.
Example: The mayor has a duty to act in the best interest of the people in his/her town.
The most common agreements that violate public policy are:
Agreements that involve an unreasonable restraint of trade
The law tries to be a protector of the rights of persons to do business freely in a competitive market…if people enter into contracts that take away these rights, the law will restore the rights to them.
Restraint of trade - a limitation on the full exercise of doing business with others
There are 3 types of contracts that are considered unreasonable restraints of trade:
1-Contracts Not to Compete (sales and employment contracts)
Restrictive covenant: a promise not to compete
- will be upheld by a court if it is reasonable in time and geographic location
If the restraint is unreasonable considering the nature of the business sold, then the restraint is unreasonable and unenforceable.
A promise not to compete agreement in an employment contract would mean employees would agree not to work at similar job for a period of time after they leave a company.
- These agreements protect the former employer from unfair competition (example: advertising agency taking away clients)
2-Price Fixing
The law views competition in the marketplace as an efficient way of determining prices.
- Occurs when competitors agree on certain price ranges within which to set their prices
- Discourages competition and raises prices
- Not enforced by courts…price fixers may be prosecuted (felony)
- Example: agreement to raise prices - This is when all competitors agree to raise prices of a product by a certain amount.
- Apple has its own stores, so it can always run full-price and not be accused of illegal price-fixing.
3-Agreements to Defeat Competitive Bidding
A bid is an offer to buy or sell goods or services at a stated price.
Competitive bidding occurs when rivals submit bids for a project; typically the firm with the lowest bid wins the contract. If bidders come together and agree not to bid lower than a certain price, their agreements and contracts are not enforceable.
Agreements to Obstruct Justice
Any contract that interferes with the administration of justice is illegal.
Agreements that would be considered obstruction of justice:
- protecting someone from arrest
- filing false police reports
- giving false testimony
- bribing a juror, agreeing to pay a non-expert to testify at a trial, or agreeing not to prosecute a person who has committed a crime in return for money.
Agreements Inducing Breach of Duty or Fraud
Many people hold positions of trust. They have a responsibility for the well-being of other people and work for the best interests of the public.
Any contract that tries to influence these representatives to use their positions for private gain is unenforceable.
Agreements Interfering with Marriage
The law encourages marriages and protects family relationships.
Contracts that discourage, harm, or interfere, with good family relationships are illegal and unenforceable.
Example: Your grandma offers to give you $25,000 to divorce your wife. You do and she only gives you $5,000. You will not be able to sue grandma because this was an agreement to interfere with marriage.
Effect of Illegality
- The courts will not aid either party to an illegal contract. Parties will not be able to enforce the agreement or receive aid from the court unless the parties are not equally at fault.
- Sometimes the court may be able to separate the legal parts of a contract from the illegal parts and enforce those. If not, the contract will be void.
THE STATUTE OF FRAUDS
Most states have laws requiring that certain contracts be in writing. These laws are called "Statutes of Frauds." There are several elements that must be included in a written contract that typically identify the place, date, involved parties, subject matter, price and terms, and intent of the parties. The contract should also contain the signature of the party who may be charged on the agreement.
BREACH OF CONTRACT
- Breach of contract - The wrongful failure to perform on or more promises of a contract.
- Who can be a witness in court for a case involving breach of contract?
Only persons who were not parties to the contract could be witness in court. (because friends and family may lie to protect you)
3. Define Perjury – making false statements under oath (it’s a crime)
4. What 7 elements must be contained in contracts (and memorandums) covered by the Statute of Frauds?
- Place, date, involved parties, subject matter, price and terms, intent of the parties, signatures of the parties
Examples: letters, sales slip, invoice, or words written on a check
The following types of contracts that must be in writing:
Example: Bob asks Sue to marry him. Sue will only accept if Bob agrees to adopt her son after the marriage. Bob accepts.
7. Contracts Requiring More Than a Year to Perform – if it takes longer than 1 year to complete the contract (from the date the contract is made, not when performance is to start), it must be in writing.
Example: Elizabeth agrees to work on a political campaign for the 18 months leading up to the election
8. Contracts to Sell Land/Real Property – Real property is land and anything permanently attached to it.
Example: buying or selling a home (Purchase contract signed by buyer and seller stating offer and acceptance of the offer)
9. Contracts to Pay Debts of Deceased Persons – executors handle the property of the deceased, they pay all debts, and divide remaining property according to terms of the will…debts are paid out of the estate…executor may promise to pay debts with his/her own money if not covered by the estate.
Example: A family member dies and you agree to pay their debts with your own money
10. Contracts to Pay Debts of Others – the debtor still owes the money, the person promising to cover his/her debt does so only if the debtor fails to pay
Example: a co-signor on your car loan
11. When there is a difference in the amount written in both words and figures on a check, which will be used?
- The amount written in words will prevail over the amount written in.
12. How will a court decide when dealing with ambiguous (confusing, vague, unclear) terms in a contract?
- The court will lean in favor of the party who did not draft the contract and against the one who drafted it.
Teacher Watkins Memorial High School