Chapter 15 Illegality When an agreement involves an act or promise that violates some legislative or court made rule the public interests threatened by the agreement outweigh the interests that favor its enforcement Such an agreement will be denied enforcement on the ground of illegality even if there is voluntary consent between two parties who have capacity to contract 1 Meaning of Illegality a An agreement is illegal either because the legislature has declared that particular type of contract to be unenforceable or void or because the agreement violates a public policy that has been developed by courts or that has been manifested in constitutions statutes administrative regulations or other sources of law i Public policy is generally taken to mean a widely shared view about what ideas interests institutions or freedoms promote public welfare ii Public policy may be based on a prevailing moral code on an economic philosophy or on the need to protect a valued social institution such as the family or the judicial system b Determining Whether an Agreement is Illegal i If a statute states that a particular type of agreement is unenforceable or void courts will apply the statute and refuse to enforce the agreement relatively few such statutes exist ii More frequently a legislature will forbid certain conduct but will not 1 address the enforceability of contracts that involve the forbidden conduct In such cases courts must determine whether the importance of the public policy that underlies the statute in question and the degree of interference with that policy are sufficiently great to outweigh any interests that favor enforcement of the agreement iii The determination of illegality would not be so clear if the agreement violated a statute that was of relatively small importance to the public welfare iv The public policies developed by courts are rarely absolute they too depend on a balancing of several factors 1 A court will consider the importance of the public policy involved and the extent to which enforcement of the agreement would interfere with that policy 2 Also will consider the seriousness of any wrongdoing involved in the agreement and how directly that wrongdoing was connected with the agreement v Illegal agreements will be classified into three main categories 1 Agreements that violate statutes 2 agreements that violate public policy developed by courts and 3 unconscionable agreements and contracts of adhesion 2 Agreements in Violation of Statute a Agreements Declared Illegal by Statute i State legislatures occasionally enact statutes that declare certain types of agreements unenforceable void or voidable ii A court would only need to interpret and apply the statute b Agreements that Violate the Public Policy of a Statute i Agreements to commit a crime 1 Contracts that require the violation of a criminal statute are illegal 2 Considered illegal under contract law as well as criminal law ii Agreements that Promote Violations of Statutes 1 Sometimes a contract of a type that is usually perfectly legal ex Contract to sell goods is deemed to be illegal under the circumstances of the case because it promotes or facilitates the violation of a statute 2 Agreements will be legal unless there is a direct connection between the illegal conduct and the agreement in the form of active intentional participation in or facilitation of the illegal act 3 When a person is aware of the other s illegal purpose and actively helps to accomplish that purpose an otherwise legal agreement might be labeled illegal iii Licensing Laws Agreement to Perform an Act for Which a Party is Not Properly Licensed 2 1 A common type of regulatory statute is one that requires a person to obtain a license permit or registration before engaging in a certain business or profession It the statute is regulatory that is the purpose of the legislation is to protect the public against dishonest or incompetent practitioners an agreement by an unlicensed person is generally held to be unenforceable 3 Where the licensing statute was intended primarily as a revenue raising measure that is as a means of collecting money rather than as a means of protecting the public an agreement to pay a person for performing an act for which she is not licensed will generally be enforced 4 Generally statutes that require proof of character and skill and impose penalties for violation are considered to be regulatory in nature Their requirements indicate that they were intended for the protection of the public Those that impose a significant license fee and allow anyone who pays the fee to obtain a license are usually classified as revenue raising The fact that no requirement other than the payment of the fee is imposed indicates that the purpose of the law is to raise money rather than to protect the public 3 Agreements that May Be in Violation of Public Policy Articulated by Courts a Agreements in Restraint of Competition i The policy against restraints on competition is based on the economic judgment that the public interest is best served by free competition If the sole purpose of an agreement is to restrain competition it violates public policy and is illegal ii iii To protect oneself the buyer or the employer might bargain for a contractual clause that would provide that the seller or employee agrees not to engage in a particular competitive activity in a specified geographic area for a specified time after the sale of the business or the termination of employment This type of clause is called an ancillary covenant not to compete or as it is more commonly known a noncompetition clause or noncompete Such clauses most frequently appear in employment contracts contracts for the sale of a business partnership agreements and small business buy sell agreements iv Enforceability of Noncompetition Clauses 1 Although noncompetition clauses restrict competition and thereby affect the public policy favoring free competition courts enforce them if they meet the following three criteria a Clause must serve a legitimate business purpose i This means that the person protected by the clause must have some justifiable interest that is to be protected by the noncompetition clause It also means that the clause must be ancillary to or part of an otherwise valid contract ii b The restriction on competition must be reasonable in time geographic area and scope i The restrictions must not be any greater than necessary to protect a legitimate interest c
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