Chapter 6 – Legality

Unenforceable Agreements

• An agreement that calls for violation of a statute, commission of a tort, or actions that are contrary to public policy is unenforceable.

Severable

• Remainder of agreement can be enforced without unenforceable provision contained in the agreement.

Types of Violations

• Malum per se:  inherently bad
• Malum prohitum:  not inherently bad; less serious

Exculpatory Clauses

• Provision that attempts to excuse a party from liability for that party’s torts
• *If the clause attempts to excuse liability for intentional or reckless conduct, it is generally unenforceable.

Restraint of Trade

• A contract provision that inhibits free trade is subject to scrutiny in court.
• The most common form of provision that might restrain trade is a covenant not to compete.

Review Materials for Chapter 6 

• Unenforceable – violations of statute, tort, contrary to public policy; malum in se
• Disbarred attorney, asked to prepare doc – unenforceable
• Pyramid scheme – form of gambling
• Confession of judgment prohibited
  • Even if there is no statute prohibiting it, courts will make agreements contrary to public policy to be unenforceable.
• Exculpatory clause to excuse liability for tortious conduct is okay; subject to certain factors:
  
  • Was it conspicuous and clear
  • What is the relationship between the parties
  • To what degree can the parties protect themselves
• Exculpatory clause for intentional and reckless conduct is unenforceable
  • Exculpatory clause only binds parties.  Party A shall not be liable for my own acts of negligence is only between them.
• Covenant not to compete – not enforceable independently; they can only be enforced as part of a larger agreement; for example when it appears in a contract for the sale of a business; there should be time limit, geographic locations, and scope of activity
  • Reasonable: depends on the nature of business; and what is necessary to protect the buyer’s legitimate interest
  • Employment contract subject to scrutiny. Time limit and geographical limitations and related to the employer’s legitimate interest.
• A contract provision that inhibits free trade is subject to scrutiny in court.
• The most common form of provision that might restrain trade is a covenant not to compete.
• Blue Penciling – Court edits parts of a contract
• In pari Delicto – The parties are equally at fault
• Arms Length Transaction – Relationship where parties have equal power to negotiate terms
• Sunday Statute – Prohibits certain transactions on Sundays; see Blue Law; like sale of liquor
• Blue Law – Prohibits certain transactions on Sundays
• Slander – False statements that hurt the reputation of another
• Exculpatory Clause – Provision that attempts to excuse a party from liability for that party’s torts
• Acceleration Clause – Causes payments to become immediately due upon the happening of stated event
• Pyramid Scheme  – Multi-level arrangement in which money is made by recruiting new people
• Hold Harmless Clause – One party agrees to compensate other for losses arising from contract; see Indemnification Clause
• Contrary to Public Policy  – Not good for society
• Insurable Interest – Legitimate financial interest in a person
• Severable – Remainder of agreement can be enforced without unenforceable provision contained in the agreement
• Malum Prohitum – Not inherently bad; less serious
• Confession of Judgment – A clause that permits immediate entry of judgment without notice or an opportunity to present defenses
• Indemnification Clause – One party agrees to compensate the other for losses arising from the contract; see Hold Harmless Clause
• Malum Per Se – Inherently bad
• Tortious – Constituting a tort
• Consumer Loan – Loan for personal or family purposes
• Usurious Contract – Charges an illegal rate of interest on a loan
• Covenant Not to Compete – Provision under which party agrees to refrain from engaging in specified business activities (“non-compete”)