Chapter 11. Legality

Aim: what makes a contract “legal”?

Legality- final requirement of a contract that ensures that an agreement has legal purpose. contracts are illegal if their purpose or manner of which they are carried out, one violate a statute, two contrary to public policy.

Chapter 11. Legality Notes

I. agreements that violate a statute(considered void).
1. contracts that violate criminal and civil law
2. violate usury statutes

1. Agreements that Violate Statutes: These agreements are illegal and void because they violate individual state statutes such as:
a. Civil and Criminal Statutes: Agreements that require one party to commit a tort or a crime are illegal.
b. Usury Statutes: Each state sets by statute a maximum interest rate that lenders can charge for loans.Interest is the fee the borrower pays to the lender for using the money. The interest rate the lender and borrower agree upon must not exceed the maximum rate allowed by state law. Charging more than the maximum legal interest rate is usury.
c. Gambling Statutes: One party wins something and the other party looses something.
d. Sunday Statutes: In many states it is illegal to make or perform contracts on Sunday. An agreement made on Sunday is void. An offer made on a day other than Sunday but accepted on a Sunday voids the resulting agreement.
e. Licensing Statutes: All states require persons to have a license to practice certain trades or professions.
2. Agreements Contrary to Public Policy: An agreement that requires the performance of an act harmful to the public benefit.
a. Agreements in Unreasonable Restraint of Trade: The law protects the rights of persons to make a living and do business in a market economy. If a contract takes away these rights, the law will restore them by declaring such a contract void. Restraint of trade is a limitation on the full exercise of doing business with others.
1. Contracts not to compete: When a person buys a business that person is also buying the seller’s goodwill. This is the continued public approval and patronage of the business. It is common to include as part of the sale contract an agreement by the seller not to open a competing business within a certain area for a period time after sale. Such a restrictive covenant, or promise not to compete will be upheld by the court if it is reasonable in time and geographic area.
2. Price Fixing: Occurs when competitors agree on certain price ranges within which they set their own prices. Price fixing discourages competition and raises prices.
3. Competitive Bidding: A bid is an offer to buy or sell goods or services at a stated price. Laws often require governments to construct public works or buy goods and services through competitive bidding. In the process, rivials submit bids for a project and the firm with the lowest qualified bid wins the contract.
b. Agreements to Obstruct Justice: Any contract that interferes with the administration of justice is illegal.
c. Agreements Interfering with Marriage: The law encourages marriages and protects family relationships. Contracts that discourage, harm, or interfere with good family relationships are illegal and, therefore, unenforceable in the courts.


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