Part 3- Contracts, Chapter 15: Illegality, Doc 5

This section addresses the consequences of illegality in contracts, including scenarios where exceptions apply, and outlines various real-world cases that explore these principles. Key Concepts: 1. Rescission Before Illegal Performance: o Courts allow a party to rescind an illegal contract before any illegal act is performed, enabling recovery of any consideration already given. This rule encourages individuals to withdraw from illegal agreements before harm is done. 2. Divisible Contracts: o If a contract has both legal and illegal components that can be separated, courts will enforce the legal portion. For example, if a contract involves the sale of a business but includes an overly restrictive noncompete clause, the court may uphold the sale while modifying or voiding the noncompete. 3. Exceptions to the General Rule Against Enforcement: o Excusable Ignorance: A party unaware of a contract’s minor illegality may recover damages if they acted without knowledge of the violation. o Protected Parties: When regulatory statutes aim to protect a party (e.g., an unlicensed service provider entering a contract with a consumer), the protected party may enforce the contract. o Not Equally at Fault: If one party is less guilty, for instance, if misled into the agreement by fraud or duress, they may be entitled to recover what they have given. Case Studies and Ethical Questions: 1. Murphy v. McNamara (Ethics in Action): o Scenario: Murphy leased a TV under a “Rent to Own” plan that concealed the high total payment amount. When she stopped payments upon learning the total cost was far above retail value, McNamara sought repossession. The case raises questions on the ethics and unconscionability of marketing rent-to-own agreements without fully disclosing total costs. 2. Noncompete Agreements: o In various cases, courts analyze whether noncompete agreements are reasonable based on geographic scope, duration, and the need to protect legitimate business interests. For example, in the Steamatic of Kansas City v. Rhea case, a former employee secretly destroyed his noncompete agreement before leaving to join a competitor. The enforceability of such agreements depends on whether they are necessary to protect proprietary interests without being overly restrictive. 3. Contracts Requiring Waivers or Arbitration: o Broemmer v. Abortion Services: A patient unknowingly signed an arbitration clause before a medical procedure, only realizing it later after complications arose. Courts consider if arbitration or waiver agreements were presented fairly, especially in high-stakes situations like medical services. o Pinnacle Condominiums: Condo buyers signed an agreement including mandatory arbitration for construction disputes. The case explores whether such a waiver of jury rights is fair, especially given the buyers' limited bargaining power. 4. Liability Waivers: o In McCune v. Myrtle Beach Indoor Shooting Range, a participant signed a liability waiver before a paintball game. After an injury due to inadequate equipment, the court assessed whether the waiver was valid, considering her awareness of the risks and the fairness of the waiver terms. 5. Illegal Agreements and Gambling: o Waffle House Lottery Case: Waffle House employees claimed an oral agreement to share any lottery winnings. However, Alabama law voids contracts based on gambling considerations, complicating claims for shared winnings without a written agreement. Summary: These principles illustrate the balance courts strive for in enforcing or voiding contracts to protect public policy, prevent exploitation, and maintain fairness in commercial transactions. Through exceptions and case-specific judgments, courts aim to prevent unfair advantages and uphold ethical standards in contractual relationships.