Chapter 13

Illegal Bargains

 

I. Violations of Statutes

          A. Licensing statutes

                   1. Some statutes do not allow unlicensed people to recover for services performed

                   2. Some statutes are only for revenue purposes, and then they do not apply

                   3. Regulatory licenses usually are interpreted to deny recovery to unlicensed people

          Pacific Custom Pools, Inc. v. Turner Construction Co., 79 Cal.App.4^th 1254 (2000)

          Facts: Contractor was to help build the Jurassic Park ride at Universal Studios.  For first part of job, contractor was licensed and was paid $897k.  During the project, license was suspended and then not renewed.  The total period of unlicensed work was seven months.  Owner refused to make final payment.

          Issue:  Is Contractor entitled to payment?
          Holding: No, unlicensed contractor is not entitled to payment.

          Reasoning:  All agree contractor had no license.  The court rejected the argument that the contractor acted reasonably, because they knew they had lost license.

 

          B. Gambling Statutes (bets are unenforceable)

 

          C. Usury Statutes (most states limit amount of interest)

          Dunnam v. Burns, 901 S.W.2d 628 (Tex.App 1995)

          Facts: L lends $35k to B.  Contract calls for B to pay back $40k in six months.  That works out to 28.57% interest.  All agree the $5k is interest, and that it is above the legal rate.

          Issue: Does it matter that B wrote the contract? 

          Holding: No, it is still usury no matter who wrote the contract.

          Reasoning:  Point of usury laws is the amount of interest, not the form or who wrote it.

 

          D. Sunday Statutes (some states forbid contracts on Sunday)

 

II. Common Law Limits

          A. Common Law Restraint of Trade (covenants not to compete)

                   1. Sale of a Business (seller promises not to compete with new owner)

                   Must be reasonable (i.e. short and limited) as to time and area

                   2. Employment (same thing, but courts disfavor even more)

          EarthWeb, Inc. v. Schlack, 71 F.Supp 299 (S.D.N.Y. 1999)

          Facts: S is a vice president with EW, responsible for website content.  He was an at will employee, but his contract said that he could not work for any competitor of EW for a year.  He leaves EW and goes to work for another company.  The parties dispute whether the new company is a direct competitor, and also whether S knows any trade secrets that could benefit the new employer.

          Issue:  Can EW get a preliminary injunction forbidding S from working for the new employer?

          Holding: No, the agreement is too broad on its face.

          Reasoning:  Under NY law, the covenant not to compete is only enforceable if it is reasonable (i.e. short), and (1) prevents solicitation or disclosure of trade secrets; (2) to prevent disclosure of information about customers; (3) or if the employee has special abilities or knowledge.

 

          B. Exculpatory Clauses    

          One cannot use clause to relieve liability for intentional misconduct.  In most states, clause must be prominent and extremely clear to relieve from negligence liability.

          Henrioulle v. Marin Ventures, Inc., 20 Cal.3d 512 (1978)

          Facts: T rents apartment.  Lease relieves LL from all liability for negligence, and T agreed to indemnify L for any liability. T tripped over rock at property and was injured.  Jury found for T, but court granted L’s motion for JNOV.

          Issue: Is the exculpatory clause enforceable?

          Holding: No, because of the one sided nature of a residential lease.

          Reasoning: The court must look closely at adhesion contracts.  LL wrote contract, and there is no room for bargaining.  The clause violates public policy.

 

          C. Unconscionable Contracts (clause is so unfair the court cannot enforce it)

          Williams, v. Walker-Thomas Furniture Co., 350 F.2d 445 (D.C. Cir. 1965)

          Facts:  Between 1956 and 1962, W bought household items on time.  Contract said that S could repossess if a payment was missed.  The contract also applied the payments pro rata, so that none of the items were getting paid off (as opposed to the payments go toward the first item, pay it off, then go to the next).  W defaulted, and S tried to repossess.

          Issue:  Is the repossession clause unconscionable?

          Holding: Maybe.  Lower court needs to reconsider case for possible unconscionability.

 

          D. Tortious Conduct

 

          E. Corrupting Public Officials

 

III. Effect of Illegality

          Usually, court will leave parties where they are.  If one party is out of luck, that is tough.

          A. Party withdraws before performance

          Sometimes, court will let party off the hook if the party withdraws early and does nothing seriously wrong

         

B. Party protected by statute

Example: Investor buys illegal security.  Court will allow them to get money back, because law is supposed to protect the investor.

 

C. Party not equally at fault

Party uses misrepresentation, duress, etc. as defense, may be able to recover payments made.

         

D. Excusable ignorance

Applies where one party is unaware of the illegal nature of transaction.  Example, sale of stolen property.

 

E. Partial illegality

Court will normally uphold contract if an illegal clause can be taken out.