Illegality in Contract Law

Chapter 15: Illegality in Contract Law

Introduction to Illegality

• Illegality refers to situations where agreements or contracts are not enforceable due to conflicting public policies, statutes, or moral standards.
• Courts may refuse to enforce agreements that violate laws or public policy, even if all parties have consented.

Learning Objectives

1. Explain the concept of illegality as it is used in contract law.
2. Determine the legality of contracts that violate statutes or public policy.
3. Analyze enforceability of noncompete clauses.
4. Analyze enforceability of exculpatory clauses.
5. Understand unconscionability and conditions for unenforceability.
6. Determine effects of illegality in contracts.

Meaning of Illegality

• An agreement may be considered illegal if:
  • It violates a criminal law (e.g., a contract to commit a crime).
  • It conflicts with a statute's provisions regarding enforceability or public policy.
• Public Policy: A widely shared societal view on promoting welfare, protecting health, and maintaining free competition.
• Agreements threatening public policy are likely deemed illegal.

Determining When an Agreement is Illegal

1. If a statute explicitly prohibits an agreement, courts will enforce this statute.
2. In the absence of explicit statute language, courts assess:
   • Importance of the public policy involved.
   • Potential interference with such policy.
3. Categories of illegal agreements:
   1. Violations of statutes.
   2. Violations of established public policy by courts.
   3. Unconscionable contracts or contracts of adhesion.

Agreements in Violation of Statute

1. Legislature Declared Illegal: Certain agreements categorized by state legislatures as void or unenforceable (example: surrogate birth contracts in Indiana).
2. Promotion of Violations: Contracts promoting illegal acts, even if not illegal by themselves, may be unenforceable if they encourage statutory violations.
3. Licensing Laws: Agreements made by unlicensed individuals often deemed unenforceable if statutes protect the public.
   • For instance, an unlicensed lawyer cannot enforce a contract to draft a will.
   • Conversely, contracts violating revenue-raising statutes may sometimes be enforced.

Public Policy and Courts

• Courts can void contracts against public interest; fairness in competition is a foundational public policy.
• Agreements that Restrain Competition: Noncompete clauses may be valid if:
  1. Legitimate business purpose exists.
  2. The restriction is reasonable in time, geographic scope, and scope of the actions restricted.
  3. It does not impose undue hardship.

Unconscionability

• Unconscionable contracts are agreements considered overly harsh for one party, entered into under coercive circumstances.
• Procedural Unconscionability: Evident in contracts of adhesion with stark power imbalances and lack of negotiation opportunity.
• Substantive Unconscionability: Focuses on unfair terms that are excessively in favor of one party or impose harsh penalties.
• Courts may refuse to enforce such contracts entirely or modify them.

Effect of Illegality

• The general rule: No legal remedy for illegal agreements, as it serves public interest to discourage such contracts.
• Exceptions where one or more parties may recover include:
  1. One party being excusably ignorant about the illegality.
  2. When both parties are equally unaware.
  3. Rescission occurred before executing the illegal act.
  4. If the illegality is a minor portion and the contract is divisible.

Contracts of Adhesion

• These are often non-negotiated agreements favoring one party that may lead to unconscionability claims.
• Courts assess terms to ensure they do not take advantage of unknowing consumers or create overwhelming disadvantages.

Summary

• Courts navigate the complexities of contract enforceability by weighing public policy, legality of agreements, and the inherent fairness of the contractual terms.