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Illegality. “In a free society the state does not administer the affairs of men. It administers justice among men who conduct their own affairs.” Walter Lippman . Learning Objectives. Meaning of illegality Types of illegal agreements Effect on contracts Special doctrines. 15 - 2.

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“In a free society the state does not administer the affairs of men. It administers justice among men who conduct their own affairs.”

Walter Lippman

learning objectives
Learning Objectives
  • Meaning of illegality
  • Types of illegal agreements
  • Effect on contracts
  • Special doctrines

15 - 2



  • An agreement will be unenforceable because of illegality if the agreement involves an act or promise that violates a law or is against public policy
    • Even if there was voluntary consent between two parties who have capacity to contract
  • Effect: no remedy for breach of an illegal agreement

15 - 3


Types of Illegal Agreements

  • Agreements that violate a statute
  • Agreements that violate public policy:
    • Agreements to commit a crime
    • Agreements promoting an illegal purpose
    • Agreement to perform an act for which the person is not properly licensed
      • Example: Riggs v. Woman to Woman P.C.
    • Agreements in restraint of competition

15 - 4


Agreements in Restraint of Competition

  • If sole purpose of an agreement is to restrain competition, it violates public policy
  • A non-competition clause restrains competition, but courts enforce the clause if:
    • It serves a legitimate business purpose,
    • Restriction is reasonable in time, scope, and geographic area
    • It does not impose an undue hardship

15 - 5


Unconscionable Agreements

  • In general, courts refuse to enforce and unconscionable contract
    • A contract with the absence of meaningful choice and terms unreasonably advantageous to one of the parties
  • UCC 2–302 gives courts power to refuse to enforce or modify unconscionable contracts for sale of goods
    • See Circuit City Stores, Inc. v. Mantor

15 - 6


Adhesion & Exculpatory Clauses

  • A contract of adhesion, usually a contract on a standardized form, is offered by a party who is in a superior bargaining position on a “take-it-or-leave-it” basis
  • An exculpatory clause(release, liability waiver) in a contract attempts to protect one party from liability for damages
  • Courts enforce these contracts unless effect is overly harsh or oppressive

15 - 7



“A verbal contract isn’t worth the paper it’s written on.”

Samuel Goldwyn, quoted in The Great Goldwyn (Alva Johnson, 1937)

learning objectives9
Learning Objectives
  • Significance of a writing in contract law
  • The Statute of Frauds
  • Contracts covered by the Statute of Frauds and the requirements
  • The UCC & the Statute of Frauds
  • The Parole Evidence Rule

16 - 9



  • In general, a writing is not required to create a legally enforceable contract
  • Writing may be required by Statute of Frauds
    • Enacted in 17th century England to prevent fraud by requiring written evidence
    • American states adopted similar statutes
  • A contract is unenforceable if it does not satisfy the statute of frauds

16 - 10


Covered Contracts

  • Collateral contracts
  • Contracts for real estate
  • Contracts for more than one year
  • Contracts for sale of goods over $500
  • Executor’s promise
  • Marriage as consideration

16 - 11


Collateral Contracts

  • Collateral contracts in which a guarantor promises to perform an obligation of a principal debtor to a third person (obligee)
    • Exception: under the main purpose or leading objectrule, no writing required if guarantor makes a collateral promise for main purpose of obtaining personal economic advantage
    • See Wintersport Ltd. v., Inc.

16 - 12


Real Estate & Sale of Goods

  • A writing is required for contracts for the transfer or sale of an interest in real estate
    • Some states require a writing for leases and certain easements on real property
  • UCC 2-201 requires a writing for contracts for the sale of goods for a price of $500 or more

16 - 13


The One Year Rule

  • A writing is required for bilateral contracts that cannot be performed within a year from the date of their formation (one year rule)
    • Likelihood of full performance is irrelevant
  • Test: is performance possible within year?
    • Example: If Jack signs contract to consult with Company X on a 13 month project, the contract must be in writing to be enforceable

16 - 14


Satisfying the Statute of Frauds

  • Most states require signed memorandum of parties’ agreement stating essential terms:
    • (a) identity of parties, (b) subject matter identified with reasonable certainty, and (c) signed by the party to be charged
    • Need not be made at time contract is made
  • Convention on International Sale of Goods does not require writing to enforce a contract

16 - 15


The Parol Evidence Rule

  • Parol evidence rule provides that, when parties enter a written contract they intend as a complete integration(final statement of agreement), a court will not allow evidence of prior or contemporaneous statements to alter or contradict terms of written contract
  • Parol evidence is admissible to explain ambiguities or allegations of fraud

16 - 16

rights of third parties

Rights of Third Parties

“The best minute I spend is the one I invest in people.”

Kenneth Blanchard, The One Minute Manager (1993)

learning objectives18
Learning Objectives
  • Assignment of Contracts
  • Delegation of Duties
  • Third-Party Beneficiaries

17 - 18



  • Sometimes a person who entered into a contract must transfer contract rights or duties to another person (third party)
  • Transfer of a right under a contract is called an assignment
  • Appointment of another person to perform a duty under a contract is called a delegation

17 - 19


Limitations on Assignment

  • Assignment will not be effective if it:
    • Is contrary to public policy
    • Violates a non-assignment clause in a contract
      • See Managed Health Care Associates v. Kethan
    • Adversely affects obligor in significant way
    • Involved a personal relationship or element of personal skill or character

17 - 20


Limitations on Delegation

  • Assignment extinguishes assignor’s right and transfers it to assignee, but delegation of a dutydoes not extinguish the duty owed by delegator to obligee
    • Delegator remains liable to the obligee unless obligee agrees to substitute new party for delegator by novation
    • In an effective delegation, performance by the delegatee will discharge the delegator

17 - 21


Limitations on Delegation

  • Duties not delegable if delegation:
    • Is contrary to public policy
    • Violates non-assignment clause in contract
    • Adversely affects obligee in significant way
    • Involved a personal relationship or element of personal skill or character

17 - 22


Third-Party Beneficiaries

  • If parties to a contract intended to benefit a third party, courts permit third party (third-party beneficiary) to enforce the contract
    • Referred to as third-party beneficiary
    • See Locke v. Ozark City Board of Ed.
  • Incidental beneficiaryis one obtaining a benefit as unintended by-product of a contract
    • No rights under contract

17 - 23