1. C H A P T E R
15
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
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2. Learning Objectives
• Explain the concept of illegality as it
pertains to contract law
• Identify illegal agreements and
discuss the effect of illegality
• Analyze effect of non-compete and
exculpatory clauses
• Explain unconscionability
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3. 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 voluntary consent existed between
two parties with capacity to contract
• Effect: no remedy for breach of an
illegal agreement
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4. Coma Corporation v. Kansas Departm
• 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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5. 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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6. 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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7. Agreements That
Violate Public Policy
• These agreements 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
– Agreements in restraint of competition
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8. 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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9. 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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10. 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 de facto corporation
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11. 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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12. 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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13. 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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14. Exculpatory Clauses
• An exculpatory clause (a release or liability
waiver) in a contract attempts to protect one
party from liability for damages
• Exculpatory clauses may be suspect on
public policy grounds, but courts will not
interfere if waiver is not a threat to public
health or safety
– Example of a clause in contravention of
public policy:
Marcinczyk v. State of New Jersey Police Train
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15. Unconscionable Agreements
• Unconscionability means the
absence of meaningful choice
together with terms that are
unreasonably advantageous
to one of the parties
• Courts refuse to grant equitable remedy
of specific performance for breach of
contract if contract is oppressively unfair
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16. 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: Moore v. Woman
to Woman Obstetrics &
Gynecology
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17. Moore v. Woman to Woman
Obstetrics & Gynecology
• Facts:
– Moore had a high risk pregnancy and was
referred by defendant medical practice
group to another gynecologist
– Before treatment, Defendant required
Moore to sign an agreement to arbitrate
all claims, including pre-dispute medical
malpractice claims
– Moore gave birth to a baby with Down
Syndrome and sued for malpractice
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18. Moore v. Woman to Woman
Obstetrics & Gynecology
• Appellate Decision:
– Trial court compelled Moore to arbitrate,
but appellate court reversed, holding that:
2.Pre-dispute agreements to arbitrate claims
for medical malpractice could be
enforceable as matter or law and were not
contracts of adhesion
3.However, in this case, several factors made
this agreement unconscionable and
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
• Is the enforcement of non-competition
clauses in employment agreements a
good public policy?
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