Powerpoint from textbook Business Law - the ethical, global, and e-commerce environment to accompany BA 330 course at the University of Alaska Fairbanks.
4. Learning Objectives
Meaning of illegality
Types of illegal agreements
Effect on contracts
Special doctrines
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5. Illegality
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
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6. Coma Corporation v. Kansas Dep
Facts & Procedural History:
Coma Corp. (Coma) entered into employment
contract with undocumented worker for
above-minimum wage, but paid less than
agreed amount, then fired worker
Worker filed claim with Dept. of Labor (DOL),
which awarded above-minimum wages
Coma appealed; court reduced DOL’s award
to minimum wage due to illegality of contract
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7. Coma Corporation v. Kansas
Department of Labor
The Appeal to Kansas Supreme Court:
Coma’s argument: employment contract
unenforceable and federal immigration
laws preempt state wage laws
Court: federal preemption not presumed,
and to deny enforceability of employment
contract would contravene Kansas public
policy to protect wages and wage earners
Reversed in favor of KS Dept. of Labor
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8. Agreements That Violate
Statutes
Sometimes government legislatures enact
statutes that declare certain types of
agreements unenforceable, void, or voidable
Examples:
New law changes the limits allowed for
interest to be charged on a loan
New law prohibiting creation of a landfill in
environmentally sensitive areas
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9. Agreements That Violate
Public Policy
Agreements that violate public policy
include:
Agreements to commit a crime
Agreements promoting an illegal purpose
Agreement to perform an act for which
the person is not properly licensed
Agreements in restraint of competition
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10. Licensing Statutes
A common regulatory statute requires a
person to obtain a license, permit, or
registration before engaging in a certain
business or profession
If the purpose of the statute is to protect the
public against dishonest or incompetent
practitioners, then an agreement is
unenforceable if an unlicensed person agrees
to do an act that requires a license
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11. Riggs v. Woman to Woman, P.C.
Facts & Procedural History:
Riggs joined defendant medical practice
after assurances that the medical practice
was a licensed professional corporation
Employment agreement contained a
covenant not to compete
Riggs discovered that defendant was not a
licensed professional corporation
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12. Riggs v.
Woman to Woman, P.C.
Issue & Court’s Discussion:
Was the employment agreement void
because defendant was not licensed?
Defendant properly attempted to obtain
the license and when it determined it was
not properly licensed, it remedied the
situation and obtained the license
Had operated as a de facto corporation
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13. Riggs v.
Woman to Woman, P.C.
Court’s Analysis & Ruling:
Purpose of the licensing
act is permissive – to
allow a medical practice
the protections of a
corporation; not to
protect the public
Since defendant did
nothing illegal, the
contract is not void
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14. Agreements in Restraint of
Competition
If the sole purpose of an agreement is to
restrain competition, it violates public policy
and is illegal
If the restraint on competition was part of an
otherwise legal contract, the result may be
different because the parties may have a
legitimate interest to be protected by the
restriction on competition
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15. Non-competition clauses
Courts enforce a non-competition clause if:
It serves a legitimate business purpose,
The restriction is reasonable in time,
geographic area, and scope
It does not impose an undue hardship
Example: Nasc Services, Inc. v. Jervis in which
the clause would “create an oppressive and
unfair scenario” for former employees
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16. Exculpatory Clauses
An exculpatory clause (a release or liability
waiver) in a contract attempts to protect one
party from liability for damages
Exculpatory clauses are perhaps suspect on
public policy grounds, but courts do not
want to interfere with the agreement if it
does not threaten public health or safety
Example: McCune v. Myrtle Beach Indoor
Shooting Range, Inc.
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17. Unconscionable Agreements
Under the doctrine of unconscionability,
courts refuse to grant the equitable remedy
of specific performance for breach of contract
if the contract is oppressively unfair
Unconscionability means the absence of
meaningful choice together with terms
unreasonably advantageous to one of the
parties
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18. Unconscionable Agreements
UCC 2–302 gives courts power to refuse to
enforce all or part of a contract for the sale of
goods or to modify such a contract if it is
found to be unconscionable
Example: Circuit City Stores, Inc. v. Mantor
Company pressured and threatened employee to
sign an agreement to arbitrate in the event of
dispute, but court believe it had gone too far
Clause was unconscionable, therefore the contract
was unenforceable
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19. Contracts of Adhesion
A contract of adhesion is
a contract, usually on a
standardized form,
offered by a party who is
in a superior bargaining
position on a “take-it-or-
leave-it” basis
Courts will enforce the
contracts unless the term
is harsh or oppressive
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20. Test Your Knowledge
True=A, False = B
An agreement that promotes violating an
environmental permit is illegal
A person can demand restitution for
breach of an illegal agreement
Non-competition agreements are illegal
agreements
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21. Test Your Knowledge
Multiple Choice
A contract of adhesion:
(a) is always illegal
(b) are contrary to public policy
(c) is a “take it or leave it” agreement
An exculpatory clause:
(a) Protects one party from liability for damages
(b) Promotes violation of a civil law
(c) Is contrary to public policy and illegal
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22. Thought Question
Do you think enforcing non-competition
clauses in employment agreements is good
public policy?
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Hinweis der Redaktion
The hyperlink is to the Kansas Supreme Court’s opinion.
The “winner” here was the worker, Cesar Martinez Corral, who was awarded back wages, but faced deportation. According to John Hanna in an article published March 24, 2007, in the Lawrence Journal-World (http://www2.ljworld.com/news/2007/mar/24/illegal_immigrant_wins_ruling_unpaid_wages/) : “The company argued, The company argued that Corral had accepted lower pay - and a place to live - until business at the restaurant picked up. The restaurant eventually closed in May 2004, costing Corral his job after seven months, said Diane Barger, an attorney representing Coma Corp.”
The hyperlink is to the case opinion.
The defendant medical practice had tried to register the company, but there was a technical flaw and the state corporate filings division had mailed the documents to the wrong address. Once the practice discovered the error, it was promptly corrected. These are the type of facts that create a de factor corporation rather than a de jure (by law) corporation. This subject will be discussed in greater detail in later chapters.
Court: “Plaintiffs argue that the covenants are reasonable both as to duration and geographic extent…. Defendants provide no unique services nor possess any extraordinary skills that could harm plaintiffs if they continue to work for the Red Bull or for any other employer in the soccer industry.…Plaintiffs have no legitimate protectable interest in preventing defendants from continuing to teach children how to play soccer…. In the current case, however, the balancing of the equities supports denial of plaintiffs’ application for injunctive relief. If plaintiffs’ application is granted, defendants will be …barred from working for any comparable business in any capacity in any part of the world. Five of the six defendants will also be forced to leave the United States because their visas depend upon their employment. This would create an oppressive and unfair scenario for defendants.” .
Case Example: McCune v. Myrtle Beach Indoor Shooting Range, Inc. Christine McCune went to the Myrtle Beach Indoor Shooting Range to participate in a paintball game with her husband and friends. Before being allowed to participate, McCune signed and dated a waiver that purported to release the Range from liability for all known or unknown dangers for any reason with the exception of gross negligence on the part of the Range…. While playing in a match, McCune caught the mask on the branch of a tree. The tree was obscured from her field of vision by the top of the mask. The mask was raised off her face because it was loose, and provided no protection against an incoming paintball pellet. The pellet struck McCune in the eye, rendering her legally blind in the eye. McCune brought a negligence suit against the Range. The Range filed a motion for summary judgment, alleging the waiver barred liability on its part. The court granted the Range’s motion, and McCune appealed. Court: “It is clear McCune voluntarily entered into the release in exchange for being allowed to participate in the paintball match. Additionally, she expressly assumed the risk for all known and unknown risks while participating….. We find the release entered into by the parties does not contravene public policy.”
Mantor began working for Circuit City. When hired, Circuit City had no arbitration program. In 1995, Circuit City instituted an arbitration program called the “Associate Issue Resolution Program” (AIRP). Circuit City emphasized to managers the importance of full participation in the AIRP, and stressed that employees had little choice in this matter. They suggested that employees should sign the agreement or prepare to be terminated. Although Circuit City circulated the forms regarding the AIRP in 1995, Mantor was able to avoid either signing up or openly refusing to participate in the AIRP for three years. In 1998, two Circuit City managers arranged a meeting with Mantor to discuss his participation in the AIRP. During this meeting, Mantor asked the two Circuit City managers what would happen should he decline to participate in the arbitration program. They responded to the effect that he would have no future with Circuit City. In February 1998, Mantor agreed to participate in the AIRP, acknowledging in writing his receipt of (1) an “Associate Issue Resolution Handbook,” (2) the “Circuit City Dispute Resolution Rules and Procedures,” and (3) a “Circuit City Arbitration Opt-Out Form.” Two years later, Mantor was terminated and he filed suit. Court: “Circuit City management impliedly and expressly pressured Mantor not to opt-out, and even resorted to threatening his job outright should Mantor exercise his putative “right” to opt-out. The fact that Circuit City management pressured and even threatened Mantor into assenting to the arbitration agreement demonstrates that he had no meaningful opportunity to opt-out of the program. . . . . Because any earnest attempt to ameliorate the unconscionable aspects of Circuit City’s arbitration agreement would require this court to assume the role of contract author rather than interpreter, we hold that this agreement is unenforceable in its entirety.”
True. False. No remedy for breach of an illegal agreement. False. Courts enforce a non-competition clause if : i t serves a legitimate business purpose; the restriction is reasonable in time, geographic area, and scope; and it does not impose an undue hardship.
The correct answer is (c) The correct answer is (a)