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Chapter 12
Legality © 2012 Byron Lilly De Anza College
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Metropolitan Creditors Service v. Sadri (1993) 9How much money did Soheil Sadri lose at Caesar’s Tahoe in Nevada? 9In what state did Soheil live? 9In what state did the casino file suit? 9What did the court decide? Why? 9Why didn’t the state file in Nevada? © 2005 Byron Lilly De Anza College
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Gambling vs. Insurance 9If you buy a fire insurance policy, aren’t you gambling on the possibility that there will be a fire? 9If you take out life insurance on your spouse, aren’t you gambling on the possibility they will be in an accident? 9The key is whether you have an “insurable interest” in the person or property. © 2005 Byron Lilly De Anza College
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Insurable Interest Examples and Types
9Close family relationship Husband to wife Parent to child
9Creditor-debtor relationship 9A company and its executives 4
Chem v. New York Life Insurance Company YOU BE THE JUDGE
9Facts 9Legal Issue 9Vote 9Outcome 9Discussion
Jimenez v. Protective Life Insurance Co. (1992) 9Jimenez sold Breton a motorcycle for $5,500, payable in weekly installments. 9Jimenez purchased an insurance policy on Breton’s life, with a payout of $320,000. 9Breton died in a motorcycle accident. 9The insurance co. paid only $5,500. 6
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Licensing Requirements 9When a licensing requirement is designed to protect the public, any contract made by an unlicensed worker or business owner is unenforceable. 9When a licensing requirement is designed merely to raise revenue, a contract made by an unlicensed person is generally enforceable.
Licenses Designed to Protect the Public
9A license to practice medicine 9A license to practice law 9A license to work as a contractor 9A license to work as an electrician or plumber 9A license to work as a pest control expert 9A license to work as a pilot 9A license to work as an accountant
Licenses Designed to Protect the Public
9A license to sell real estate 9A license to work as an architect 9A license to work as a chiropractor 9A license to work as a dentist 9A license to work as an acupuncturist 9A license to dispense hearing aids 9A license to work as a pharmacist 9A license to work as a marriage and family counselor
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Licenses Designed Merely to Raise Revenue 9A license to operate a taxicab 9A license to sell liquor 9A license to operate a card room 9A license to operate a street vendor’s cart 9A license to sell furniture © 2005 Byron Lilly De Anza College
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Authentic Home Improvement v. Mayo
9Authentic Home Improvements performed work on Diane Mayo’s home. 9She sued for return of the money she had paid. She won. 9“Even when homeowners knowingly hire a contractor who lacks a license and then benefit from his work, they are not required to pay him.” – From the court’s opinion 11
Usury Laws Usury laws prohibit charging interest in excess of statutory maximums on loans. 9Usury laws are complicated. 9Basic laws apply to loans made by unlicensed lenders. 9Separate statutes govern the interest rates that licensed lenders may charge. 12
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Jersey Palm-Gross, Inc. v. Henry Paper
9In this case, as in the chapter opener, the court declared the entire agreement illegal, void and unenforceable, and refused to enforce the agreement. 9Why didn’t the court order Henry Paper and Anthony Pugliese to at least pay back the principal on the loan? © 2005 Byron Lilly De Anza College
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Illegal as Against Public Policy
9Noncompetition agreements that are not ancillary to a legitimate bargain 9Some noncompetition agreements that are ancillary to a legitimate bargain 9Some exculpatory clauses 9Unconscionable contracts © 2005 Byron Lilly De Anza College
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Noncompetition Agreements Sale of a Business When a noncompetition agreement is ancillary to the sale of a business, it is enforceable if reasonable in: 1. Time 2. Geographic area, and 3. Scope of activity. © 2005 Byron Lilly De Anza College
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Noncompetition Agreements Employment Contracts A noncompete clause in an employment contract is generally enforceable only if it is: 1. Essential to the employer 2. Fair to the employee, and 3. Harmless to the general public © 2005 Byron Lilly De Anza College
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Pike’s Pique
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Exculpatory Clauses Clauses that attempt to release (in advance) a party from liability for ordinary negligence in the event of an injury to another party or their property. Rule #1: Generally unenforceable when it attempts to exclude an intentional tort or gross negligence. © 2005 Byron Lilly De Anza College
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Exculpatory Clauses Rule #2: Generally unenforceable when the affected activity is in the public interest, such as medical care, public transportation, or some essential service. Rule #3: Generally unenforceable when the parties have greatly unequal bargaining power. © 2005 Byron Lilly De Anza College
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Exculpatory Clauses Rule #4: Generally unenforceable unless the clause is clearly written and readily visible.
© 2005 Byron Lilly De Anza College
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Ransburg v. Richards
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Ransburg v. Richards 9Unequal bargaining power 9Rental apartments are a service that is in the public interest 9The likely behavioral consequences of enforcing this exculpatory clause are undesirable. We want to incent apartment owners and managers to take reasonable steps to keep their grounds safe. 22
Exculpatory Clauses
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Bailment 9 When you leave your clothes at the dry cleaners to be cleaned, you have performed a bailment. 9 You are the bailor. 9 The owner of the dry cleaning business is a bailee. 9 Bailees frequently put exculpatory clauses in their contracts. © 2005 Byron Lilly De Anza College
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Bailment 9 When the bailee is engaged in an important public service, such as car repair, a court is less likely to enforce the exculpatory clause. 9 When the bailee is engaged in a less essential service, and is not in a position to naturally know whether the property is “in danger,” such as self-storage rental, a court is more likely to enforce it.
Bailment Examples
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Unconscionable Contract A contract that a court refuses to enforce because of fundamental unfairness 9The UCC explicitly adopted unconscionability in 1952. 9Since then, its appearance in common law decisions has grown. © 2005 Byron Lilly De Anza College
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Unconscionable Contract: The Old Rule A contract is unconscionable if and only if its terms are such that: 1. No honest and fair man would propose, and 2. No man in full possession of his senses and not under delusion would agree to. 28
Unconscionable Contract: The New Rule A contract is unconscionable if and only if there was both: 1. Oppression in the bargaining, and 2. Unfair surprise in the result, meaning the result is unfair and its unfairness was not easy to spot during the negotiation. 29
Adhesion Contract A contract offered on a standard form on a “take it or leave it basis” 9Often contain exculpatory clauses 9Strong evidence of oppression (unequal bargaining power) 9Court will scrutinize contract © 2005 Byron Lilly De Anza College
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Worldwide Insurance Co. v. Klopp
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Worldwide Insurance Co. v. Klopp As to oppression, the insurance company drafted the contract and presented it to Klopp as a “take it or leave it” agreement. She had no opportunity to bargain any terms. As to surprise, Klopp probably gave little or no attention to the arbitration clause. Even if she read the arbitration clause, she would have been unlikely to appreciate the effect of the appeal provision. Both parties had the right to appeal a large award, which makes the provision seem eminently fair. It would take a very sophisticated consumer to realize that only one side–the insurance company–would be likely to exercise the appeal right, and to understand that in the case of a low award, the consumer would have no appeal right. 32
Unconscionability Under UCC 2-302 “If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable…the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may…limit the application of any unconscionable clause…” © 2005 Byron Lilly De Anza College
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Effect of Illegality 1. Leave the parties “in pari delicto” 9 Any contract whose subject matter is illegal by statute, a.k.a. a contract that is illegal.
E.g. murder, arson, burglary, receipt of stolen goods, illegal gambling
9 Some violations of usury laws in a few states, e.g. over 25% in Florida © 2005 Byron Lilly De Anza College
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Effect of Illegality
2. Ignore the illegal clause but enforce the rest of the contract 9 Most noncompete clauses that are too broad 9 The portion of an exculpatory clause that attempts to excuse gross negligence or an intentional tort. 9 Exculpatory clauses when the service provided is “in the public interest” 35
Effect of Illegality 3. “Substitute other terms for” (modify) the illegal clause
9 Most violations of usury laws in most states Most states reset the interest rate to zero for the remainder of the loan and order the lender to pay back double any interest collected thus far. 36
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Effect of Illegality
4. Order that the contract be rescinded and all monies returned. 9 When a licensing statute is designed to protect the public:
Unlicensed person cannot do the work. Unlicensed person must return any monies received. Buyer gets any work already done for free, even if they had knowledge of the other’s lack of license at the time of contract formation. 37
When does the law let you lie? 1. When the other party needs a license* to perform the work, you can lie and say “sure, I’ll pay you.”
2. When the other party has said “I will only complete my contractual obligations to you if you agree to pay me more money.” (Exceptions: goods, unforeseen circumstances) 3. When a contract is illegal by statute, such as a contract to lend money for the purpose of gambling, or an illegal gambling contract. 4. When the other party has asked “Will you accept this partial payment as payment in full of my liquidated debt to you?” *of a type designed to protect the public
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When does the law let you lie? 5. Firm offers other than those that are the subject of a valid option contract or that qualify as binding firm offers under UCC 2-205.
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