II

CHAPTTR
WMnW*s

TE A RIIING O B I E CI I V E S
56libertvof
C H APTEN OUItIl{E
.CONTRACTUAL
CAPACITY AFTER THISCHAPTER,
READING BEABLE
YOUSHOULD contlact
IS
TOANSWER THEFOLLOWING QUESTIONS:
.LEGALITY notanabsolute
What are some exceptionsto the rule that a
OFILLEGALITY
-THEEFFECT minor can disaffinn (avoid)any contract?
It is
concePt.
Does an intoxicatedpersonhave the capacityto
tomany
relative
enter into an enforceablecontract? conditions
Does the mental incompetenceof one party oftimeand
necessarilymake a contractvoid?
placeand
Under what circumstanceswill a covenantnot to
compete be enforceable?When will such
circumstance,)'
covenantsnot be enforced? Benjamin Cardozo, I 870-1938
(Associatejustice of the
What is an exculpatoryclause?In wl-ratcircum- tlnited StatcsSuprcne Court,
I 932- l 938)
stancesmight exculpatoryclausesbe enforced?
When will they not be enforced?

ourtsgenerallywant contractsto be enforceable,and much of the law is devotedto

aidini the enforceabilityof contracts.Noneiheless,as indicated in the chapter-
opening quo"tation,"liberty of contract" is not absolute.h'r other words,not all people can
tJgdty binding contractsai all times. Contractsenteredinto by personslacking the
-"t.
c"pa.iry"to do ,o be voidable.Similarly, contractscalling for the performanceof an
-"'y
Iillegal act are illegal and thus void-they are-notcontractsat
all. In this chapter,we exam-
ine contractualcapacityand some aspects of illegal bargains'

Courts CONTRACTUAT CAPACIfi

Contractual capacity is the legal ability to enter inio a contractualrelationship' ThethresholdmentalcaPacitY
generallypr"r,rr11.the existenceof contractual capacity, but in some capacity
situatiot-ts,
requiredby law for a PartYwho
i, lu.king'o, may be questior-rable. A personwl-rohas been determined by a court to_be entersinto a contractto be bound
by that contract.
mentally"incompetent,for example,cannot form a legally binding contract with another
to enter into a valid contract but
party. In other situations,a partlmay havethe capacity
i]]"i rlro havethe right to ruoid iirbllity r-rnderit. For example,minors--or infants,asthey
In this
nr.'.o-*or1ly referied to in the law-usr-rally are not legally bound by contracts'
section,we look at the effect of youth, intoxication, and n'rental incompetence on con- 287 EtrfiHIT
ANDLEGALITY
CAPACITY
tractual capacity.
 288llnilmll
CONTRACTS
re
The LegalInformation
lnstituteat CornellLaw
Schoolprovidesa table with links
to state statutesgoverningthe
emancipationof minors.Co to
Table_Emancipation.htm.
EMANCIPATION
In regardto minors,the act of being
freedfrom parentalcontrol;occurs
when a child'sparentor legal
guardian relinquishesthe legalright
to exercisecontroloverthe child.
Normally, a minorwho leaveshome
to supporthimselfor herselfis
considered emancipated.
DISAFFIRMAN€E
Thelegalavoidance,or settingaside,
of a contractual
obligation.
This minor is discussing the purchase
of a used car with o solesperson.
When o minor disaffirms a controd,
such os o contract to buy o car, most
stotes require the minor ta return
whotever he or she purchosed, if it is
within his or her control. Why do
some sfofes require more?
(MichaelNewman/PhotoEdit)
&tT * $'#
lwfi T ittr $i i:;
Minors
Today,in virtually all states,Ihe age of maiority (when a personis no longer a minor) {or
contractualpurposesis eighteenyears-the so-calledcoming of age.(The age of major-
ity may still be hventy-onefor other purposes,however,such as the purchaseand con-
sumption of alcohol.) In addition, some statesprovide for the termination of minority on
marriage. Minority status may also be terminated by a minor's emancipation, which
occurswhen a child's parent or legal guardianrelinquishesthe legal right to exercisecon-
trol over the child. Normally, minors who leavehome to supportthemselvesare consid-
ered emancipated. Several jurisdictions permit minors to petition a court for
emancipationthemselves.For businesspurposes,a minor may petition a court to be
treatedas an adult.
The generalrule is that a minor can enter into any contractan adult can, providedthat
the contract is not one prohibited by law for minors (for example,the sale of aicoholic
beveragesor tobacco).A contract entered into by a minot, however,is voidable at the
option of that minor, subject to certain exceptions(to be discussedshortly).To exercise
the option to avoid a conhact, a minor need only manifestan intention not to be bound
by it. The minor "avoids"the contractby disaffirmingit,
Disaffirmance The legalavoidance,or settingaside,of a contractualobligationis referred
to as disaffirmance.To disaffirm,a minor must express,through wordsor conduct, his or
her intent not to be bound to the contract.The minor must disaffirmthe entire contract,
not merelya portion of it. For instance,a minor cannotdecideto keeppart of the goodspur-
chasedunder a contractand return the remaininggoods.When a minor disaffirmsa con-
tract, the minor can recover any property that she or he transferredto the adult as
considerationfor the contract,even if it is then in the possession of a third party.l
A contract can ordinarily be disaffirmedat any time during minorityl or for a reason-
able time after the minor comes of age.What constitutesa "reasonable"time may vary.
Two months would probablybe consideredreasonable, but exceptin unusualcircum-
stances,a court may not find it reasonableto wait a year or more after coming of age to
disaffirm.If an individual fails to disaffirman executedcontractwithin a reasonabietime
after reaching the age of majority, a court will likely hold that the contracthas been rati-
fied (ratificationwill be discussedshortly).
Note that an adult who entersinto a contract with a minor cannot
avoid his or her contractualdutieson the ground that the minor can do
so. Unlessthe minor exercisesthe option to disaffirmthe contract,the
adult party normally is bound by it.
A Minor's Obligations on Disaffirmance Although all staies'laws
permit minors to disaffirm contracts(with certain exceptions),includ-
ing executedcontracts,statelawsdiffer on the extentof a minor's obli-
gationson disaffirmance.
Maioilty Rule. Courts in a majority of stateshold that the minor
need only return the goods(or other consideration)subiectto the con-
tract, provided the goods are in the minor's possessionor conkol.
tnExAMpTE ttfl Jim Garrison, a seventeen-year-old,purchasesa com-
l. The Uniform CommercialCode (UCC), in Section2 403(l), allowsan exceptionif the third partl is a'good
faith purchaserfor value."SeeChapter19.
2. In somestates,however,a minor who entersinto a contractfor the saleofland cannotdisaffirmthe contractuntil
sheor he reachesthe ageofmajorilv.
 289EIEIMII
ANDLEGATITY
CAPACITY

puter ftom Radio Shack.While transportingthe computer to histrome, Garrison,through

no fault of his own, is involved in a car accident.As a result of the accident,the plastic
casingof the computer is broken. The next day,he returnsthe computer to Radio Shack
and d--isaffirmsthe contract. Under the majority view, this return fulfills Garrison'sduty
eventhough ihe computer is now damaged.Garrison is entitled to receivea refund of the
purchaseprice (ifpaid in cash)or to be relievedofany further obligationsunder an agree-
ment to purchasethe computer on credit. El

Minoity Rute. A growing number of states,either by statute or by court decision, place

an addiiionalduty on the minor-the duty to restorethe adult party to the positionshe or
he held before tire contract was made. tFExAIttPtE tttr Sixteen-year-old JosephDodson
bought a pickup truck for $4,900 from a used-car dealer. Although the truck developed
proLl.*r nine months later,Dodson continued to drive it until the engineblew
-eJh"rric"l
up and it stoppedrunning. Then Dodson disaffirmed the contract and attempted to rehrrn
the truck to lhe dealerfor a refund of the full purchaseprice. The dealerrefusedto accept
the pickup or refund the money. Dodson filed suit. Ultimately, the TennesseeSupreme
Co.,tt Dodson to disaffirmthe contractbut requiredhim to compensatethe seller
"llo1y.d
for the depreciatedvalue-not ihe purchaseprice-of ihe pickup.3E fftis exampleillus-
tratesthe tend among today'scourts to hold a minor responsiblefor damage,ordinary wear
and tear,and depreciationof goodsthat the minor usedprior to disafiirmance.

Exceptionsto the Minor's Right to Disaffirm Statecourtsand legislatureshavecarved

out sJveralexceptionsto the minor's right to disaffirm.Some contractscannot be avoided
simply asa matter of law, on the ground of public policy. For example.marriagecontracts
andcontracts to enlist in the armed servicesfall into this category.Other contractsmay
not be disaffirmedfor different reasons,including thosediscussedhere,

Misrepresentationof Age. Supposethat a minor tells a sellershe is hventy-oneyearsold

when she is really seventeen.Ordinarily, the minor can disaffirm the contract even
though she has misrepresented her age.Moreover, in some iurisdictionsthe minor is not
liable for the tort of fraudulent misrepresentation,the rationale being that such a tort
judgment might indirectly force the minor to perform the contract.
'
Ilr-, l,irisdictiot s, ho*"u.r, a minor who has misrepresented his or her age can be
-"1ry
bound by a contract under certain circumstances. First, several stateshave enacted
statutesflr preciselythis purpose.In thesestates, misrepresentation of age is enough to
prohibit disaffirmance.Other statutesprohibit disaffirmance by a minor who has engaged
in businessas an adult. Second,some courts refuse to allow minors to disaffirm executed
(fully performed) contractsunlessthey can teturn the consideration received. The com-
binrilin of the minors' misrepresentations and their uniust enrichment has persuaded
thesecourtsIo estop(prevent)the minors from assertingcontractualincapacity.

Contracts fot l,Jecessaries. A minor who enters into a contract for necessariesmay disaf-
firm the contractbut remainsliable for the reasonable value of the goodsused.Necessaries NECESSARIES
Necessitiesrequiredfor life,suchas
are basic needs,sr,rchas food, clothing, shelter,and medical sewices,at a level of value food,shelter,clothing,and medical
requiredto maintain the minor'sstandardof living or financial and socialstatus.Thus, what attention;may includewhateveris
may be a luxury for another.Additionally, believedto be necessary to maintain
wili be considereda necessary for one person
a person'sstandardof livingor
what is considereda necessary dependson whether ihe minor is under the careor control financialand socialstatus.
of his or her parents,who are required by law to provide necessaries for the minor. If a

t Drd*" r. Shr"drr1zl S.W.zd 545 (Tenn. 1992).See alsoRestatementQhird) of Restitution,Sections16 and

33 (2004).
2e0
llEiluu
CONTRACTS

fTnilllitlll,'tl':l A minor'sstationin life minor'sparentsprovidethe minor with shelter,for example,then a contractto leaseshelter
(including financialandsocial (such asan apaltment)normaliy will not be regardedasa contractfor necessaries.
statusand lifestyle)is importantin (l) the item contractedfor
determining whetheran item is a Generally, then, to qualify as a contract for necessaries,
necessary or a luxury.ForexamPle, must be necessary to the minor's existence,(2) the value of the necessaryitem may be up
clothingis a necessary but if a to a level required to maintain the minor's standard of living or financial and social sta-
minorfrom a low-incomefamily guardian who is required
tus, and (3) the minor must not be under the care of a parent or
contracts for the purchaseof a
$2,000leathercoat,a courtmay to supply this item. Unlessthesethree criteria are me! the minoi can normally disaffirm
deemthe coata luxury.ln this the contractwithout being liable for the reasonable vaiue of the goods used.
situation,the contractwould not
be for "necessaries." The issuein the following casewaswhether a medical servicesprovider could collect
from a minor, asa contractfor necessaries, the cost of emergencyservicesrenderedto the
minor when his mother did not pav.

SupremeCourt of Connecticut,26TConn.35l,838 A.2d 179 (2OO4).

ANDFACTS a Connecticutstatecourt againstthe boy who shot Fountain

BACKGROUND
4......-...;
ln March 1996.HarunFountain and obtainedpaymentfor Fountain's medicalcare.These
was shotin the backof the headat point-blankrangeby a fundswere depositedin an account-sometimesreferredto as
playmate.Fountainrequiredextensivelife-savingmedical an "estate"-established on Fountain'sbehalf.Yalefiled a suit
servicesfrom a varietyof providers,includingYaleDiagnostic againstFountain'sestate,askingthe courtto orderthe estate
Radiology. Yalebilled Fountain'smother,VernettaTurner- to pay Yale'sbill, but the court refusedto grantthe order.Yale
Tucker,forthe cost of its services,$12694,but she did not pay. appealedto a stateintermediateappellatecourt,which
Instead,in January2001,Turner-Tucker filedfor bankruptcy reversedthis rulingand orderedthe payment.The estate
(seeChapter27), andall of her debts,includingthe amount appealedto the statesupremecourt.
owed to Yale,were discharged. Meanwhile,shefiled a suit in

J.pusticel
0F THEC0URT. . , BIRDEN,
f N THEWORDS

Connecticr,rthas long recognizedthe common-lawrule that a minor child's contracts

are voidable.Under this rule, a minor may, upon reachingmajority,chooseeitherto ratify
or to ayoidcontractualobligationsenteredinto during his minority.The traditionalreason-
ing behind this rule is basedon the well establishedcommonlaw principlesthat the law
should protectchildren from the detrimental consequences of their youthful and improv-
ident acts,and that children should be able to en'iergeinto adulthood unencumberedby
financial obligationsincurred during the courseof their minority. The rule is further sup-
ported by a policy of protecting children from unscrupulousindividualsseekingto profit
from their youth and inexperience.lEmphasisadded.]
The rule that a minor'scontractsare voidable,howevet,is not absolute.An exceptionto
this rule, eponymouslyknown as the doctrine of necessaries, is that a minor may not avoid
a contractfor goodsor servicesnecessary for his health and sustenance. Such confractsare
binding evenif enteredinto during minority, anda minor,upon reachingmaiority,may not,
ot o*\oYr*of law, disaffirmthem. lEmphasisadded.l

We have not heretoforearticulatedthe particular legal theory underlying the doctrine

of necessaries. We thereforetake this occasionto do so, and we conclude that the most
apt theory is that of an implied in law contract, also sometimesreferred to as a quasi-
contract. * * *
In distinctionto an implied in fact contract,a quasi or implied in law contractis not a
contract,but an obligation which the law createsout of the circumstances present,even
 29rGlnmn
ANDLEGALITY
CAPACITY

CASEI l. l - Cont if t ued

t' t' {' It is basedon equitableprinciplesto

though a pare did not assumethe obligation
* * {c . With no other test
operatewhenever justice requirescompensationto be made
than what, under a given set of circumstances,is just or unjust, equitableor inequitable,
* x * 1o examinethe circum-
conscionableor unconscionable,it becomesnecessary
stancesand the conduct of the partiesand apply this standard.lEmphasisadded.]
Thus, when a medical servicesprovider rendersnecessaryrnedical care to an injured
minor, two contractsarise:the primary contractbetweenthe providerand the minor'spar-
ents; and an implied in law contract between the provider and the minor himself. The
primary contractbetweenthe providerand the parentsis basedon the parents'duty to pay
* * * . Such contracts,where not express,may be
ior their children'snecessaryexpenses
implied in fact and generallyariseboth from the parties'conduct and their reasonable
expectations.The primacy of this contract means that the provider of necessartes must
make all reasonableeffortsto collect from the parentsbefore resorting to the secondary,
implied in law contractwith the minor'
The secondaryimplied in law contractbehveenthe medical servicesprovider and the
minor arisesfrom equitableconsiderations,including the law'sdisfavorof uniust enrich-
ment. Therefore,where necessary medical servicesare renderedto a minor whoseparents
do not pay for them, equity and justice demand that a secondaryimplied in law conhact
arisebelween the medical servicesprovider and the minor who has receivedthe benefits
of those services.These principles compel the conclusion that, in the circumstancesof
the presentcase,the fdefendantis] liable to the plaintiff, under the commonlaw doctrine
of for tl-reservicesrenderedby the plaintiff to Fountain.
1e;eya;ies,
The judgment is affirmed.

Supreme
rtreconnecticut
ANDREMEDY
DECISI0N F0RCRITICAL ANALYSIS- Social
Courtaffirmedthe judgmentof the intermediate appellate hove
might
Considerationwhat in
hoppened
court.A partywho providesemergencymedicalservicesto a future cosesif the court hod held thot there was no inplied-in-
minor can collectfor thoseservices from the minor if his or low contractbetweenFountoinond Yole?
her parentsdo not pay.Thus,Yalecould collectfrom
Fountain'sestatefor the cost of its servicesunderthe doctrine
of necessaries.

tr
Insurance and Loans. Traditionally,insurancehas not been viewed as a necessary, so
minors can ordinarily disaffirmtheir insurancecontractsand recoverall premiums paid.
Nevertheless,some jurisdictionsprohibit disaffirminginsurancecontracts-for example,
when minors contract for life insuranceon their own lives. Financial loans are seldom
consideredto be necessaries, even if the minor spendsthe borrowedfunds on necessaries.
If, however,a lender makes a loan to a minor for the exPresspurpose of enabling the
minor to purchasenecessaries, and the lender personallymakessure the funds are so
spent,the minor normally is obligatedto repaythe loan.

Ratification In contractlaw, ratification is the act of acceptingand giving legal force to RATIFICATION
Theact of acceptingand givinglegal
an obligation that previouslywas not enforceable.A minor who has reachedthe age of forceto an obligationthat previously
maiority can ratify a contractexpresslyor impliedly. Expressratificationoccurswhen the was not enforceable.
individual, on reaching the age of majority, statesorally or in writing that she or he
intendsto be bound by the contract. Implied ratificationtakesplace when the minor, on
reaching the age of majority, indicatesan intent to abide by the contract.
 sltrsil
292
CONTRACTS

a letterto Lin stat-

I-EIAMP_LE-Il3LinentersacontracttosellherlaptoptoArturo.a.minor.[fArturod
tt"t'i"g the ageof maiority'writes
not disaffirmth" .o'1t'"tii"a' ""
ing ,r'"..-,"
hestill
that 9ir-,1. 1;J;t'r*$;lf:*i,,L::iii:::*Xl"i;"ff:fl:
takes
Ar"t.tro of the laptop a-s
possession " -1:ot the contract' E
ratlfled
ing the age of maiortry,;;;;t't*o1iedly reaching the age
within ,.rro.,able time after
If a minor fails to airriir- " .Jntract " the conduct constitutesimplied ratifi-
whether
of majority, then a ."J;;r,;.t"r^ir]. contract rharis executed(fti1y
.onrt, pr.r,-ri'rr;'iil
cation or disaffirmance.Generally, " executory(not yet performed
i' ttlll
ratiiied. e .""ni.iitt"i
performedby both sides)was
to be disaffirmed'
bv both parties)t, "o"'l'lly considered

Pa re n ts ,L i a b i l i t yA sageneral rul e' parentsarenot]i ab]eforthecontractsmadeby

which the parents
own, exiept contractsfor necessaries'
minor children acting or-th"i, ordinarily require parentsto coslgn
fr,rls ls why businesses
are legally required t" p-"ra" obligatedto per-
The pare-ntstI'.,'' b..o-. personally
anv contract *,de *ith ^ minor.
.""i*.., if their child avoidsliabiliq''
f"i*;ilili,i;", "rir-" "u",rfo, ttreirowntorts.The parentsof the minor can
Normally,minorsJ;;**li-iirUi. b. liableif theyfailedto
liableir, ..rt"i., situations. I" ,o*" ,i;il, o"t*u
alsobeheld
,',"*or'r1to'"1dhave knownthatthislackof con-
-ry
exercise properparenr"i;;"1 *hen theyt par-
of hrt,o t" ftt*o-ryt---t-.@tAneleven-year-old's
trol posed rrnr.rro.";;;iJ "tt'ot at*"s negligently and causes
",-r
entsallowhim to dri".;;'; f,tUti" .o"ar. fffitlf"ta (negligence)'
b" h"ld liable theminor'stort
for
someone elseto be iniured,thepaients kindsof tor-
states have ."r.i.a i-por" ti"uitity on p".l:lP for certain
-ay
,tatut.stt'rrt
E other malicious'
,u.h thosethai arewillful and
tiousactscommittedt, ,#;;i1.1*", ^,

Persons
lntoxicated
wasintoxicated at
an issuewhena P'1Y'toa'con!11ct
Contractualcapacityalsobecomes
Intoxicationi' to'lditio" in which''aP"T:j':::T'?lsul-
the time the contractwasmade' ' the personwas
Uyalcoholor someotherdrug.lf
capacityto act or tfr.l"i'i, i"f"iir.a uoidatle evenif the
."pr.ity,'til"".""1,"t'
ficientlyintoxicatedio t".t mental -1y. it
intoxicationwaspurelyvoluntary'F":tl:to''tt""ttobevoidable'however'theperson
andiudgmentsoseverelv that
mustprovethatthe t;;l;;;i;; i-pri..d t',"ior;;;;ff"" In
into the contract'
sheor he did not .";;;;.,.d ,frgi.g' .""r.q.r.,,.", of entering
claiming intoxication
the maiori,yoi rrra.t,the person
addition,to avoidthe contracti'
received'
mustbe ableto returnall consicleration of theag(eement'
an. unclerstood thelegalconseqxences
If, despitelr-,too.riio", n.::"" ihe contract are foolish
f".t t#l;; ,"?-t
the contract i, "r-,io*.rU1". th" "f (r-rnlessthe otherparty
,r* contractvoidable
or obviouslyt uo,t1,."oti"r;;;ay;;i, ""a -rl.
iecaus"it is difficultto deter-
fraudulentlyinduceclthepersonto'becomeintoxicated).Asapracticalmatter,courts
on the grouni
permitcontracts to be avorded "ii"a"i."tio", Ratherthaninquire
i,rto*i."i.Jio avoidlegal.duties'
minewhethera partywassufficiently focus obiectiveindica-
on
into the intoricaiedperson,s mental,t"t", ;;;; .o.tri" i*tZtd
to intoxication'-
tionsof capacrty a" d#;;" *rr.,rr* ir.,"contractis voidableowing

Persons
lncomPetent
MentallY
C o n tra c ts m a debymentai l yi ncompetentP el sonscanbevoi d,voi dabl e , or valid. Welook
apply'
deteimine when theseclassifications
here at the circumstancesthat
a
presenledas case 9 1 in chapter
q. -.
s"", tor court'sdecision itLucy t zehmer'
"""-pl"Jh"
 295EIEHtr
ANDLECALITY
CAPACITY r
ii
:i
When the Contract Will Be Void If a court has previouslydeterminedthat a personis :
mentally incompetentand hasappointeda guardianto representthe person,any contract i

made by that mentally incompetentpersonis void-no contractexists.Only the guardian

can enter into a binding conkact on behalf of the mentally incompetent Person.

When the Contract Will Be Voidable If a court has not previouslyjudged a personto
be mentallyincompetentbut in Factthe personwasincompetentat ihe time, the contract
may be voidable.A contract is voidableif the persondid not know he or she wasentering
into the contractor lackedthe mental capacityto comprehendits nature,purpose,and
consequences.In such situations,the contract is voidable at the option of the mentally
incompetentpersonbut not the other party.The contractmay then be disaffirmedor rat-
ified (if the person regains mental competence). Like intoxicated persons,mentally
incompetent personsmust return any considerationand pay for the reasonablevalue of
any necessaries they recelve.
hEXAMFLE uE Milo. a mentally incompetentman who had not been previously
declaredincompetent by a fudge, agreesto sell hventy lots in a prime residentialneigh-
borhood to Anastof.At the time of enteringthe contract,Milo is confusedoverwhich lots
he is selling and how much they are worth. As a result,he contractsto sell the properties
for substantiallylessthan their market value. If the court finds ihat Milo was unable to
understandthe nature and consequencesof the contract, the contract is voidable.Milo
can avoid the sale,providedthat he returnsany considerationhe received.E

When the Contract Will Be Valid A contract enteredinto by a rnentally incompetent

person (whom a court has not previouslydeclaredincornpetent)rnay also be valid lf Ihe
p.trotl had capacityat the time the contractwas formed.For instance,a Personmay be Poyday loons ore populor with
,bl. to understandthe nature and effectof entering into a certain contractyet simultane- individuols who do not have regulor
ously lack capacityto engagein other activities.In such cases,the contractordinarilywill banking relationships. A client writes
b. u"hd bec",rr. ti-r.p.rrlotiir not legallymentally incompetentfor contractualpurposes.5 o check for some relotively smoll
Similarly, an otherwisementally incompetent person may have a lucid intewal-a tem- amount to be coshed at "PoYdaY,"
porary restorationof sufficient intelligence,jr-rdgment,and will to enter into contracts- usually in two weeks.About 10
during which she or he will be consideredto have full legal capacity' million IJ.S.residents apply for these
loons in ony given yeor. The implicit
interest rates ore extremelY high,
sometimesmore thon I OOPercent
on on onnuolized bosis. lIVhyluould
To this point, we have discussedthree of the requirementsfor a valid contractto exist- anyone ogree to poy so much for
agreement,consideration,and contractualcapacity.Now we examinethe fourth-legaliqt such a short-term loon?
For a contractto be valid and enforceable,it must be formed for a legal purPose. (SethAnderson/Creative Commons)
A contract to do somethingthat is prohibited by federal or statestaiutorylaw is ille-
gal and, assuch,void from the outsetand thus unenforceable.Additionally,a con-
tract to commit a tortiousact or to commit an action that is contraryto public
policy is illegal and unenforceable.

to Statute
Contrary
€ontracts
Statutes often set forth rules specifying which terms and clauses may be
included in contractsand which are prohibited. We examine here severalways
in which contractsmay be contraryto a statuteand thus illegal.

5. Modern coufis no longer require a personto be completelyirrational to disaffirmcontractson the

basisofmental incompetence. A contractmay be voidableif, by reasonofa mental illnessor defect,an
individual wasunable to act reasonablywith respectto the transactionand the other party had reasonto
know of the condition.
2e4mlliE
CONTRACTS

crime is a contract in viola-

Contracts to Commit a Crime Any contract to commit a
of which is prohibited by
tion of a statute.Th.rr, a .o,-rtractto sell an illegal drug (the sale
is iendered iliegal
statute)is not enforcerUt..tf tn. object or p.rf[r*rr-r* of the contract
to be dis-
by statuteafter Ihe contract has been entered into, the contract is considered
in Chapter i4.)
.i,"rg"a by ir*. (Seethe discussionof impossibilityof performance

USURY
Chargingan illegal rate of interest.
interestthat can
Usury Virtually everystatehas a statutethat setsthe maximum rate of
loans. A lender who
be .iarged for different types of transactiors,including ordinary
usury' The maxi-
makes a loan at ,n inter.si rate above the lawful maximum commits
for lenderswho
mum rate of interestvariesfrom stateto state,as do the consequences
the principal of a loan
make usurious]oans.Some statesailow the lender to recoveronly
is denied recoveryof
along with interestup to the legal maximum. In effect,the lender
the lender can recoverthe principal amount of the loan
the excessinterest.ln other state"s,
but no interest.
exceptionsare
Although usury statutesplace a ceiling on allowable ratesof interest,
exemptcorporateloans
made to f"".ilitrt. burinesstiansactions.For erample, many states
allowing much
from the usury iaws. ln addition, almost all statis have special statutes
loansto help thoseborrowers who need funds and could not
hisher interestrateson small
otherwiseobtain loans.

as any schemethat
Gambling All stateshave statutesthat regulategambling-defined
by ch"ance ,il]o,'tg p.ttont who_have paid valuable
involvesthe distribution of property
(chance) to receive the property.6 Gambling is the cre-
considerationfor the opport,]ni'g,
it. Traditionally, the states have deemed gam-
ation of risk for th. p.rrpor. of
"rru-ing
bling contractsillegai and thus void.
and New Jersey,
Ii seueralstatef however,i'rcluding Louisiana,Michigan, Nevada,
states,certain forms of gambling are legal. california,
gambling is legal. In other
"^rino poker as a crime, although criminal statutes prohibit
fo, ha"snot iefined draw
"*"i,rpl",other types of gambling games.A nr,rmberof statesallow gambling ojr horse
,rrrr,r"ro.r,
races,and the rnalority of"statesha'vI legalizedstate-operated lotteries.as well as lotteries
(such as bingo) conducted for charitable Pulposes. Many statesalso allow gambling on
Indian reservations'
the risk sharinginher-
Sometimes,it is difficult to distinguisha gambling contractfrom
Ii on" caie, five co-workers each receivedsome
ent in almostall contracts.mH"-t--r-#-ta
,greed to split the winnings if one of the tickets
free lottery ticketsfrom r frrto*.tl"d
glrrr.J, this may seem entirely legal. The court, how-
turned out to be the winner. At first
.rr. "was an exchange of promises to sharewin-
ever,noted that the orai contract ir-,Ihi,
lottery tickets upon the happening of the
nings from the parties' individually owned
win. Cor.seq,]ently, concluded the court, the
uncertainevent"that one of the ticklts would
"founded on a gambling consideraiio"" ttd therefore was void'7 E
agreementat tssuewas

can be applied in the

Online Gambling A significantissuetoday is how gambling-1aws
to gambling differ' online gambling ra,ises
Internet context.Becausestatelawspertaining
in th"ose states that do not allow casino gambling
a number of unique issues.For ."r-p].,
do if residents of the state place bets
o, offtrrck betting, what can a state government
gambling occur? Suppose that a resident of
online? Also, where does the actual a'ct of
iite located in Antigua' Is actual
New York placesbetsvia the Internet at a gambling -the.
to a New York court
,ci of "ga,obling" taking place in New Yorlior in AntiguaZAccording

6. SeeWshing Well Club t. Akron,I12 N E 2d 41 (Ohio Com Pl l951)

7. Dickersonv. Deno,770 So.2d6l (Ala 2000)'
 295@tr
ANDLECALITY
CAPACITY

Adultsgamble ot o casino. Would

this some odivity be illegol if it were
conductedonline?If so,could it be
prevented?How?
(Marc Levin/CreativeCommons)

in one case,"if the personengagedir-igambling is located in New York, tl-ienNew York

is the location where the gambling occurred."ECourts of other statesmay take a different
view, however.
Another issuethat is being debatedis rvhetherenteringcontractsthat involve gambling
on sportsteamsthat do not reallyexist-fantasy sports-is a form of gambling.For a discus-
sion of this issue,seethis chapter'sAdapting the Law to the Online Environmentfeatureon
the following page.

Sabbath (Sunday) Laws Statutesreferredto as Sabbath(Sunday)lawsprohibit thefor-

mation or performanceof certaincontractson a Sunday.'fheselaws,rvhichdateback to
colonialtimes,are oftencalledblue laws,asmentionedin Chapter2. Blue lawsget their BLUEIAWS
Stateor locallawsthat prohibitthe
name from the blue paper on which New Haven, Connecticut,printed its town ordi- performance of certaintYPesof
nance in l7B1 that prohibited work and required businessesto close on Sunday. commercialactivitieson Sundav'
Accorclingto a few statl and local larvs,ail contractsenteredinto on a Sundayare illegal.
Laws ir-roiher statesor municipalitiesprohibit only the sale of certain typesof merchan-
dise,such as alcoholicbeverages, on a Sunday.
In rnoststatesu,ith such statutes,contractsthat were enteredinto on a Sundaycan be
ratified cluring a weekday.Also, if a contractt1'ratu,asenteredinto on a Sundayhas been
ful1yperfomed (executed),normally it cannot be rescinded(canceled).Exceptionsto
S"tr,fuy laws permit contractsfor necessities(sucl-ras food) and works of charity. Many
statesdo not enforce Sunday laws, and some state courts have held these larvsto be
unconstitutionalbecausethey interferewith the freedon-rof religion.

Licensing Statutes A11 states require that members of certain professionsobtain

licensesillo*it-rg then to practice. Physicians,lawyers,real estatebrokers, architects,

v. Cohen,260 F.3d.68 (2d Cir. 200I )

8, LlnitedStates
le6llNIIUil
CONTRACTS

s manyas20 million Testing Aspe(tin Court

the Gambling
adultsin the Uniied Thus far, the courtshavehad the opporhrnityto rule only on
Statesplay someform of whetherthe pay-to-playfantasysportssitesthat chargean
fantasysportsvia the entrancefee and offer prizesto the winnersare running gam-
Internet.A fantasYsPortis a bling operations. CharlesHumphreybroughta-lawsuitagainst
gamein which particiPants, Viac'om,ESPN, The SportingNews'and other hostsof such
oftencalledowners, build fantasysportssitesunder a New ferseystatutethat allowsthe
.tr
teamscomposedof real-life recoveryofgamblinglosses. Humphreyclaimedthatthe fan-
olarersfrom differentreal- tasysports leagues *.r. g"-"t of chance,not gamesof skill,
iif"t"r-t. Eachfantasyteamcompetesagainstthe fantasy b""",ts" eventi beyond the control could deter-
participants'
teamsbeiongingto other ownels.At the end of eachweek,the mine the or.rtcome-for example,a starquarterbackmight be
statisticalp.ifot*rtt."t of all the real-lifeplayersare translated
injured. He alsopointedout that in the ofiline world, federal
into points,and the pointsof all the playerson an owner'sfan- law prohibitsany gamesof chance,such assweepstakes or
tasyteam aretotaled.Nthough a wide varietyof fantasygames drawings,that requireentrantsto submitconsideration in
are available,mostparticipantsplay fantasyfootball' On many ordertJ play.Coisiderationhasbeen definedasthe purchase
fantasysportssites,participantspay a fee in orderto play and of , prod.tci or the paymentof money.For theseteasons,he
usetlre site'sfacilities,suchasstaiisticaltrackingand message the entrancefeesconstitutedgamblinglossesthat
boards.At the end of the season,prizesrangingfrom T:shirtsto "rgrr.d,
could be recovered.
flat-screen televisions areawardedto the winners. The federaldistrictcourt that heardthe caseruled against
instances,
In otl-rer the participantsin fantasysportsgam- Humphrey,mostlyon proceduralgrounds,but the court did
ble directlyon the outcome. In a fantasyfootballleague,for
concludethrt , matterof law the entrancefeesdid not
example,eachparticipant-owner addsa givenamountto the "t
constitute"bets"or "wagers"becausethe feesarepaid
pot and then "drafts"his or her fantasyteamfrom actual unconditionally,the prizesofferedarefor a fixed amountand
-l,trational
Football Leagueplayers.At the end of ihe football certainto be awarded,and the defendantsdo not compete
season,eachowner'spointsaretotaled,and tl-reownerwith for the prizes.bThe court alsoobservedthat if a combination
the mostpointswir-rsthe Pot. of entrancefeesand prizesconstitutedgambling,a hostof
contestsrangingfrom golf tournamentsto trackmeetsto
Congress WeighsIn spellingbeesand beautycontestswould be gamblingopera-
As online gamblingl-rasexpanded, Congress hasattemptedto tions-a conclusionthat the court deemed"patently
regulateit- In iate 2006,a federallaw went into effectthat absurd."cNote, however,that the caseinvolvedonly pay-to-
makesit illegalfor credit-card companiesand banks to engage olav sites.The court did not haveto addressthe questionof
in transactioirswitl-rInternetgamblingcompanies.a Although whetherfantasysporissitesthat enableparticipantsto con-
in the hopesof winning it at the end of the
the law doesnot prohibitindividualsfrom placingonlinebets, tibute to a pot
gau-iblingsites.
in effectit makesii almostirnpossiblefor them to do so by pre- seasonconstitute
ventingthem from obtainingfinancingfor online gamlling'
comprehensive, but it F0RCRfTICALANAtYSISWhatarguments can
At firsiglance,the legislationapPears
specifically eiemptsInternetwagerson horseracing,state be usedto suPporttheideathot playing fantasy
Iotteries,and fantasysports.Hence,one could argueihat sportsrequiresskill?
Congressl-rasdeterminedthat fantasysportsdo not constitute
a prohibitedInternetgamblingactivity. F'Supp'2d-,2oo7 WL1797644
b. Humphreyv. Viocom,lnc.,-
for Every
andAccountability
a. Security PortAct,PublicL' No' 109-342 (D.N.J.2oo7).
Stat.I884 (2006).(Aversionof theUnlawful c. ln reachingthis conclusion, the federaldistrictcourtcitedportions
Sections5361-5367,120
Gambling
lnternet EnforcementActof 2006wasincorporated intothis of an ArizonaSupremeCourtruling, Stotev.AmericanHolidoy
Association,tnc., 151 AtiZ.3"12,727 P.zd8o7 ('l986).
asTitleVlll.)
statute
 297GlEEtr
CAPACITY
ANDLECALITY

electricians,and stockbrokersare but a few of the people who must be licensed.Some

licensesare obtained only after extensiveschoolingand examinations,which indicate to
the pr-rblicthat a specialskill has been acquired.Others require only that the particular
personbe ofgood moral characterand pay a fee.

The Purpose of Licensing Statutes. Generally, businesslicensesprovide a means of

regulating and taxing certain businessesand protecting the public againstactions that
could threaten the generalwelfare.For example,in nearly all states,a stockbrokermust
be licensedand must file a bond with the stateto protectthe public from fraudulent trans-
actionsin stocks.Similarly, a plumber must be licensedand bonded to protect the pub-
lic against incompetent plumbers and to protect ihe public health. Only personsor
businessespossessing the quaiificationsand complying with the conditions required by
statr-rte
are entitled to licenses.
For instance,the owner of a bar can be requiredto sell food
as a condition of obtaining a licenseto serveliquor.

Contracts with Unlicensed Practitioners. A contract with an unlicensed oractitioner

may still be enforceable,dependingon the nature of the licensing statute.Some states
expresslyprovidethat the lack of a licensein certain occupationsbarsthe enforcementof
work-relatedcontracts.If the statute does not expresslystate this, one must look to the
underlying purposeof the licensing requirementsfor a particular occupation.If the pur-
poseis to protectthe public from unauthorizedpractitioners,a contractinvolving an unli-
censedindividual is illegal and unenforceable.If, however,the underlying purposeofthe
statute is to raise government revenues,a contract with an unlicensed practitioner is
enforceable-althoughthe unlicensedpersonis usuallyfined.

Contracts to Public
Contrary Policy
Although contractsinvolve private parties,some are not enforceablebecauseof the neg-
ative impact they would have on society.These contractsare said Io l:e contraryto public
policy. Examplesinclude a contract to commit an immoral act, such as selling a child,
and a contract that prohibits marriage. lEExAMprE lfl Everett offers a young man
$10,000if he refrainsfrom marrying Everett'sdaugl-rter. If the young man accepts,no con-
tract is formed (the contract is void) becauseit is contrary to public policy. Thus, if the
man marries Everett's daughter, Everett cannot sue him for breach of contract. E
Businesscontractsthat may be contraryto pr-rblicpolicy include contractsin restraintof
tradeand unconscionable contractsor clauses.
EMPTOYMENT CONTRACT
A contractbetweenan employerand
Contracts in Restraint of Trade Contractsin restraintof trade (anticompetitiveagree- an employeein whichthe termsand
ments) usuallyadverselyaffectthe public policy that favorscompetition inlhe ecotro-y. conditionsof employmentarestated,
Typicaliy, such contractsalsoviolate one or more federal or statestatutes.e
An exception €OVENANT NOT TO COMPETE
A contractual promiseof one party
is recognizedwhen the restraintis reasonableand is part of, or supplementalto, a con- to refrainfrom conductingbusiness
tract for the sale of a businessor an employment contract (a contract statingthe terms similarto that of anotherpartyfor
and conditions of employment).Many such exceptionsinvolve a type of restraintcalled a certainperiodof time and within
a specifiedgeographic area.Courts
a covenant not to compete, or a restrictivecovenant. commonlyenforcesuchcovenants
if they are reasonablein termsof
CovenantsNot fo Compete and the SaIeof an OngoingBusiness. Covenants(prornises) time andgeographic areaandare
partof, or supplemental to, a
not to competeare often containedas ancillary(secondary,
or subordinate)clausesin con- contractfor the saleof a business
tractsconcerningthe sale of an ongoing business.A covenantnot to compete is created or an employmentcontract.

9. Federalstatutesprohibitinganticompetitive
agreements
includethe ShermanAntitrustAct, the ClaytonAct, and
the FederalTradeCommissionAct. SeeChapter37.
2e8IINIIUU
CONTRACIS
REFORMATION
A court-ordered conectionof a
writtencontractso that it reflects
the true intentionsof the parties.
UNCONSCIONABTE
CONTRACT
(on uHcorrrscroNABrE crAusE)
A contractor clausethat is void
on the basisof publicpolicy
becauseone party,as a resultof
disproportionate bargaining power,
is forcedto accepttermsthat are
unfairlyburdensome andthat
unfairlybenefitthe dominatingparty"
when a selleragreesnot to open a new storein a certain geographicareasurroundingthe
old store. Such agreementsenablethe sellerto sell,and the purchaserto buy, the goodwill
and reputationof an ongoingbusiness.If, for example,a well-knownmerchantsellshis or
her storeand opensa competingbusinessa block away,many of the merchant'scustomers
will likely do businessat the new store.This renderslessvaluablethe good name and rep-
utation sold to the other merchantfor a price. If a covenantnot to competeis not ancillary
to a salesagreement,however,it wili be void becauseit unreasonablyrestrainstradeand is
contraryto public policy.
Covenants Nof to Compete in Employment Contracts. Agreementsnot to compete
(sometimesreferredto as noncompeteagreemenfs) can alsobe contained in employment
contracts.People in middle- or upperJevel managementpositionscommonly agreenot
to work for competitorsor not to startcompetingbusinesses for a specifiedperiod of time
after termination of employment. Such agreementsare legal in most statesso long as the
specifiedperiod of tirne (of restraint) is not ercessivein duration and the geographic
restriction is reasonable.To be reasonable,a restriction on competition must protect a
legitimate businessinterestand must not be any greaterthan necessaryto protect that
interest.l0(For a discussionof what is reasonablein the online environment,see this
clrapter'sManagementPerspective feature.)
EnforcementProblems. The iawsgoverningthe enforceabilityof covenantsnot to com-
pete vary significantiyfrom stateto state.In some states,such as Texas,such a covenant
will not be enforcedur-rlessthe employeehas receivedsome benefit in return for signing
the noncompeteagreement.This is true even if the covenantis reasonableas to time and
area.If the employeereceivesno benefit, the covenantwill be deemed void. California
prohibits the enforcementof covenantsnot to compete altogether.
Occasionally,dependingon the jurisdiction, courtswill reform covenantsnot to com-
pete. If a covenantis found to be unreasonablein time or geographicarea,the court may
convert the terms into reasonableones and then enforce the reformed covenant.This
presentsa problem, however,in that the judge has implicitly become a party to the con-
tract. Consequently,courtsusually resortto contractreformation oniy when necessary to
preventundue burdensor hardships.
UnconscionableContractsor Clauses Ordinarily,a court doesnot look at the fairnessor
equityof a contract;for example,a court normallywill not inquire into the adequacyof con-
sideration.Personsare assumedto be reasonablyintelligent,and the court doesnot come to
their aid iust becausethey have made unwiseor foolishbargains.In certain circumstances,
however,bargainsare so oppressive that the courtsrelieveinnocent partiesof part or all of
their duties. Such a bargain is called an unconscionablecontract (or unconscionable
clause).Both the Uniform Commercial Code (UCC) and the Uniform ConsumerCredit
Code (UCCC) embodythe unconscionabiliq,concept-the former with regardto the sale
of goodsand the latterwith regardto consumerloansand the waiverof rights.rrA contract
can be unconscionableon either proceduralor substantivegrounds,as discussed in ihe fol-
lowing subsections and illustratedgraphicallyin Exhibit 1l-l on page300.
Procedural LJnconscionability. Proceduralunconscionabilityhasto do with how a term
becomespart of a contractand relatesto factorsbearingon a party'slack of knowledgeor
10.See,for erample, Could& Lamb,LLC r. D'Alusio, 949So.2d1212(Fla.App. 2007).SeealsoMoorev.Midwest
Distibution,Inc., 76Ark.App. 197,65 S.W3d190(2002).
ll. See, f or ex am ple , U C C 2 - 3 0 2 a n d 2
a -n7d1U9C
, C C5 l 0 8 a n dI 1 0 7 .
 2ggr*rEffi8
ANDLECALITY
CAPACITY

Management In a latercase,a federaldistrictcourtenforced

a legallssue
Faces a one-yearnoncompeteagreementagainstthe founderof a
law-related Websitebusiness eventhoughno geographic
Forsomecompanies,
restriction was includedin the agreement. According to the
particularlythosein high-
cour! ?lthough thereis no geographic limitationon the
tech industries, tradesecrets
provision, this is nonetheless reasonable in lightof the national,
are their most valuable
and indeedinternational, natureof Internetbusiness."b
assets.Often,to prevent
Thesaleof an Internet-only businessinvolvesliterallythe
departingemployeesfrom
full worldwidescopeof the lnternetitself.In a recentcase,a
disclosing tradesecretsto competingemployers, a comPany
companysellingvitaminsoverthe lnternetwas soldfor more
asksits key employees to sign covenqnts not to compete, in
than $2 million,Thepurchaseagreementcontaineda
which theyagreenot to set up a competingbusinessor work
noncompeteclausethat prohibitedthe sellerfrom engagingin
for a competitorin a specifiedgeographic areafor a certain
the saleof nutritionaland healthproductsvia the Internetfor
periodof time. Generally, the time and geographicrestrictions
four years.Despitethe noncompeteagreementafterthe sale,
must be reasonable. A serious issuefacingmanagement today
the sellercreatedat leasttwo lnternetsitesfrom which he sold
is whethertime and spacerestrictions that havebeendeemed
healthproductsand vitamins.Whenthe buyersuedto enforce
reasonable in the pastwill be considered reasonable in today's
the noncompeteagreement, the courtheldfor the buyerand
changinglegallandscape, which includesthe Internet
enjoined(prevented)the sellerfrom violatingthe agreement.c
environment.
Thecourtpointedout that the sellercouldstillengagein his
WhattheCourts Say formerbusinessby usingnon-lnternetmarkets.Theselleralso
remainedfreeto sellothertypesof productson the Internet.
Thereis littlecaselaw to guidemanaSement on this issue.
One caseinvolvedMarkSchlachwho workedas a Web site lmplications for Managers
managerfor EarthWeb, Inc.,in New York.Schlacksigneda
Management in high-techcompanies shouldavoid
covenantstatingtha! on terminationof his employmenthe
overreaching in terms of time and geographic restrictions
would not work for any competingcomPanyfor one year.
in noncompeteagreements. Additionally, when considering
Whenhe resignedand acceptedan offerfrom a companyin
the reasonability of time and placerestrictions, the courts
Massachusetts to designa Website,EarthWeb suedto enforce
tend to balance time restrictionsagainst other factors, such
the covenantnot to compete.Thecourtrefusedto enforcethe
as geographic restrictions. Because for Web-based work
covenant,in part becausetherewas no evidencethat Schlack
the geographicrestrictioncan be worldwide,the time
had misappropriated any of EarthWeb's tradesecretsor clients.
restrictionshould be narrowedconsiderably to comPensate
Thecourtalsostatedthat becausethe lnternetlacksphysical
for the extensive geographic restriction.
borders,a covenantprohibitingan employeefrom workingfor
a competitoranywherein the world for one yearis excessive in
duration.a b. WestPublishing Corp.v.Stanley,2004 WL73s90(D.N.D. 2004).
c. MyVitoNet.com v.Kowolski, - F.Supp.2d 2008WL203008(5.D.
-
a. EarthWeb, tnc.v.Schlock,Tl F.SuPP.2d299(S.D.N.Y. 1999). Ohio2008).

understandingof the contract terms becauseof inconspicuousprint, unintelligible lan-

guage ("legalese"),lack of opportunity to read the contract, lack of opportunity to ask
questionsabout the contract'smeaning, and other factors.Proceduralunconscionability
sometimesrelatesto purported lack of voluntarinessbecauseof a disparityin bargaining
power betweenthe hvo parties.Contractsenteredinto becauseof one party'svastlysupe- ADHESION CONTRACT
contract,suchas
rior bargainingpowermay be deemedunconscionable. Such contractsare often referred A "standard-form" retailerand a
that betweena large
to as adhesion contracts.An adhesioncontract is written exclusivell,by one partv (the consumer, in whichthe stronger
dominant party, r-rsuallythe seller or creditor) and presentedto the other (the adhering partydictatesthe terms.
300TWIIilEI
CONTRACTS

basis.12In other words, the

party, usually the buyer or borrower) on a take-it-or-leave-it
adheringparty has no opportunity to negotiatethe terms of the contract.

SubstantiyeUnconscionabikty. Substantiyeunconscionabilitycharacterizes thosecon-

tracts,or portions of contracts,that are oppressiveor overly harsh.Courts generallyfocus
on provisionsthat deprive one party of the benefitsof the agreementor leave that party
without remedy for nonperformanceby the other. lEExIilFLeTr.CiA person with little
income and only a fourth-gradeeducationagreesto purchasea refrigeratorfor $4,000and
signsa two-yearinstallment contract.The sametype of refrigeratorusually sellsfor $900
on the market.Somecourtshaveheld that this type of contractis unconscionablebecause
the contract terms are so oppressiveas to "shock the conscience"of the court.l3 E
Substantiveunconscionability can arise in a wide variety of businesscontexts.For
example, a contract clause that gives the businessentity free accessto the courts but
requiies the other party to arbitrateany disputewith the firm may be unconscionable.la
Similarly, an arbitration clausein a credit-cardagreementthat preventscredit cardhold-
ersfrom obtaining relief for abusivedebt-collectionpracticesunder consumerlaw may be
unconscionable.l5Contracts drafted by insurancecompaniesand cell phone providers
have been struck down as substantivelyunconscionablewhen they included provisions
that were overlvharshor one sided.rb

l 6l A .2d69(1960).
1 2 .Se e ,fo r e xa m p l e,H enni ngsenvB l oomfi el dMotors,Inc.,S 2N .J.35B ,
f5 . Se e ,fo r e xa m p le,
l onest.S tarC redi tC orp.,59Mi sc.2d189,298N .Y S .2d264(1969).Thi scas ew i l l bepres ented
in Chapterl8 asCase18.3.
Wi sconsi nA utoLoans,l nc.v.
1 4 .Se e ,fo r e xa m p l e, Wi s.2d5l 4,7l 4N .W2d 155(2006).
l ones,290
15. See,for example,Coarlyv. CrossCountyBank,2007WI App 26, 299Wis.Zd420,729N.W.Zd732 (2007).
16. See,for example,Cattonv.T-MobileUSA,Inc., 152Cal,App.4th571,61 Cal.Rptr.3d344(2007);Kinkelv
CingularWireless, LLC,223lll.Zd 1, 857 N.E.2d 250, 306 lll.Dec. 1.57(2006);andAul v. ColdenRuleInsurance
Co.,2007WI App 165,737 N.W.2d 24 (.2007).
 5OIEIEEtr
CAPACITY
ANDLECALITY

Exculpatory Clauses Closelyrelatedto the conceptof unconscionabilityareexculpatory EXCUTPATORY CLAUSE

clauses-clausesthat releasea party from liability in the event of monetary or physical A clausethat releases a contractual
partyfrom liabilityin the eventof
injury no matterwho is at fault. Indeed,courtssometimesrefuseto enforcesuch clauseson monetaryor physicalinjury no
the ground that they are unconscionable.lnrxnrvrpr-rr r.5l An employerreqgiresits employ- matterwho is at fault.
eesto sign a contractcontaininga provisionthat shieldsdre employerfrom liabiiity for any
injuries to thoseemployees.In that situation,a court would usually hold the erculpatory
clauseto be contraryto public policy.i7p Exculpatoryclausesfound in rental agreements
for cominercial property are frequently held to be contrary to public policy, and such
clausesare almostalwaysunenforceablein residentialpropertyleases.
Although courts view exculpatoryclauseswith disfavor,they do enforce such clauses lil':Ifl':ffiTl:ffl Nearlyeveryoneis
liablefor hei or his own torts,
when they do not contravenepublic policy, are not ambiguous,and do not claim to pro-
and this responsibility cannot
tect parties from liability for intentior-ralmisconduct. Businessessuch as health clubs, be contractedawav.
racetracks,amusementparks,skiing facilities, horse-rentaloperations,golf-cart conces-
sions,and skydivingorganizationsfrequently use exculpatoryclausesto limit their iiabil-
ity for patrons'injuries. Becausetheseservicesare not essential,the firms offering them
are sometimescor-rsidered to have no relativeadvantagein bargainingstrength,and any-
one contractingfor their servicesis consideredto do so voluntarily.
Sometimes,a company includes an indemnification provision in its contractswith
independentcontractors(see Chapter 2B). Such a provision, or clause, removes any
responsibilityon the company'spart for accidentsthat happento the independentcon-
tractor while working for the company.When is such a provisionagainstpublic policy?
This wasthe main questionin the following case.

l 7 F orac as e w i t h s i m i l a r f a c t s ,se e L ittle Ro ck&F o r tSm ith Ra iL wa yC o.v.E ubanks,,18A rk.460,3S .W.808(1887)
Today,this typeofexculpatoryclausemay alsobe illegalbecauseit violatesa stateworkers'compensation law.

Court of Appealsof Kentucky,250 S.W.3d339 (2008).

BACKGROUND
ANDFACTS Whenhe was helpingload it on a truck,he fell and was
SpeedwaySuperAmerica, LLC, injured.ErwinsuedSpeedway for damagesresultingfrom the
hired SebertEnruinto provide"GeneralContracting" for five injuryhe suffered.
Speedway counterclaimed, seeking
years,but reservedthe rightto end the contractat any time. en{orcement of the contract's
indemnification clause.Enruin
The contractcontainedan indemnificofionclause.Underthat movedto dismissthe counterclaim on the groundsthat the
clause,Enruinpromisedto "hold harmless" Speedway for indemnificationclausewas invalidand unenforceable because
anythingthat happenedto him while workingfor the it was againstpublicpolicy.Thetrial courtheldfor Erur'rin.
company.One day,Erwinwas told to reportto a Speedway Speedway appealed.
gasstationin anothercityand help removea walk-infreezer.

f N THEW0RDS0F THEC0URT. . . ACREE,

tudge.

First, wl-ierea party usesan indemnification provisionto defend againstits own negli-
gence,any distinctionbetweena preinjuryreleaseand an indemnificationprovisioncan
become, as it has in this case,analyticallynegligible.When an indemnitee fhere,
Speedway]usesan indemnificationprovisionin such a manner,the provisionbecomes
,n._"ti of an exculpatory,preinjury release.
"_rt_.Ouivalent
A keyfactor,perhapsIhe keyfactor, in the analysisof both preinjury releasesand indemni-
fication protisions usedto defendthe indemnitee'sown negligence,is the relative bargaining
powerof the partieswho enter into them. lF,nphasis added.] C A S El l . 2 - C o n t i n u e s n e x t p a g e
502IINII@
CONTRACTS

CA S EI1.2 -Con tinu ed The predominantfact of fhis caseis the disparityin bargainingpower existingbehveen
thesehvo parties.Not only did Erwin have only an eighth gradeeducation,the one-sided
contract terms themseivesare strong indication of the superior bargaining position
Speedwayenjoyed.Other than the grosscompensationfor his work, it is difficult to seeany
benefit Erwin receivedunder this contract.Speedway's ability to cancelthe five-yearcon-
tract "at any time, for any reason"made eventhe term iilusory.Erwin appearsto havebeen
burdenedwith the requirementsand restrictionsof at-will employmentby Speedway,but
with no employee-typebenefits.While his annual compensationrangedroughly behveen
$38,000and $55,000,he wasresponsiblefor payinghis own taxesand health insurance,as
well asincurring the costof any additional"personnel,materials,and equipmentnecessary
to complete" the Work. His obligation to provide liability insurance,which he did main-
tain, wasasmuch for Speedway's benefit ashis own. That obligation,aswell asthe require-
ment that he maintain worker'scompensationand auto insurance,further reduced the
vaiue of his compensation.Without the abiliry, absentSpeedway's consent.to assignthe
contractor subcontractthe Work, the contractitselfhad little independentvalue as intan-
gible property.Even if he could obtain Speedway'sconsentto assignor subcontract,we
doubt Erwin could find a party willing to undertakethe responsibilitiesof this contractat
a price that would yield Erwin any profit at all. We are not in doubt that there wasa signif-
icant*disparityin the bargainingpositionsof the partiesto this contract.

The IKentucky] SupremeCourt recognizedthat "exculpatoryclauseshavebeen inval-

idatedmore frequentlyin the contextof personalinjury caseswhere an individual is often
* x x employment from a party in a
forced to sign a releaseto obtain a necessitysuch as
superiorbargainingposition."We believethe casebefore us presentssuch circumstances
that wernust find the provisioninvalid.

Such prot'isions,whether preiniury releasesor indemnification provisionsapplied to

defendagainstthe indemnitee'sown negligence, are not againstpublic policy generally,but
* x * It was
they are when agreedto by a party in a clearly inferior bargaining position.
improbablethat Erwin intended to undertakesr,rchan indemnification of Speedway,and
we wor-rld,and do, declarethe provisioncontraryto public policy. IEmphasisadded.]

court
rtreappeals
ANDREMEDY
DECISI0N the
affirmed IF THEFACTS
W HAT DIFFER EN T ?
W ERE
provision
trialcourt'sruling,holdingthat the indemnification Supposethot Erwin worked for onother compony as a
was contraryto publicpolicyand would not be enforced. Such mover ond his employerhad senthim to help Speedwoymove
provisionsare not alwaysagainstpublicpolicy,but theyare the freezer.Supposefurther thot the indemnificotionclause
when thereis no bargaining betweenpartiesof similar was in o controct signed between Speedwoy and Erwin's
strength.Theyare especiallydisfavoredin the employment employer. Would thot clause be valid? Exploin your answer.
relationship.

Should exculpgtory clausesallow the signer on opportunity to bdrgainT Before you may
engagein a varietyof activities,suchas joininga gym or takinga lap arounda miniaturecar
racecourse,you may be askedto signan agreementcontaining a clausereleasingthe owner
of the operationfrom liabilityfor any injurythat you may suffer.Suchexculpatoryclausesare
common.Nevertheless, courtsfrequentlyrefuseto enforcethem'
The WisconsinSupremeCourt, for example,has invalidatedevery exculpatoryclause
broughtbeforeit in the last twenty-fiveyears.A recentcaseinvolvedthe death of a woman
 50JETIEEIIil
CAPACITY
ANDLECALITY

who drownedin a privateswimmingand fitnessfacilityaftersigninga generalwaiverrelease

statement.ls TheWisconsin SupremeCourtruledthat the exculpatory agreement was invalid
because, amongotherthings,the signerdid not have"any opportunityto bargain." Indeed,
waiver-of-liability
agreementsare almostalwayspresentedon a take-it-or-leave-it basis.Thus,
if all courtswere to make"an opportunityto bargain"a requirement for a-validagreement,
virtuallyall exculpatory
clauses would be deemedinvalid.Thatwould meanthat underno cir-
cumstances couldthe creatorof the waiver-otliability
agreementavoidliability-evenif the
signerof the agreement was loo percentat fault and negligent. The resultwould be higher
Iiabilityinsuranceratesfor all businessesdealingwith the public.Suchhigherinsurance rates
would be ultimatelypassedon to consumersin the form of higherpricesfor those who
engagein downhillskiing,go to gyms,and do bungeejumping.ls this a fair outcome?

In general,an illegai contract is void: the contract is deemed never to have existed,and
the courtswill not aid either party. In most illegal contracts,both partiesare considered
to be equally at farlt-in pari delicto.If the contract is executory(not yet fulfiiled), nei-
ther party can enforce it. If it has been executed,there can be neither contractual nor
quasi-contractualrecovery.
That one wrongdoerin an illegal contract is unjustly enriched at the expenseof the
.
other is of no concern to tl-relaw-except under certain circumstances(to te discussed
shortly).The rnaior iustificationfor this hands-offattitude is that it is improper to place
the machinery of iustice at the disposalof a plaintiff who has broken the iaw by entering
into an iliegal bargain.Another justification is the l-ioped-fordeterrenteffect of this gen-
eral rule. A plaintiff who suffersa lossbecauseof an illegal bargain will presumablybe
deterredfrom entering into similar illegal bargainsin the future.
There are exceptionsto the generalrule that neither party to an iliegal bargaincan slre
-
for breacl-rand neither party can recover for performance rendered.We look at these
exceptionshere.

f u sti fiable
lgnor a n o
cef t h eF a c t s
When one of the partiesto a contract is relativelyinnocent (has no reasonto know that
the contract is illegal), that party can often recoverany benefitsconferred in a partially
executedcontract.In this situation,the courtswill not enforcethe contractbut will allow
the partiesto return to their originai positions.
A court may sometimespermit an innocent party who has fully performed under a
contractto enforcethe contractagainstthe guilty party. lEEFArvrprEr r.rol A trucking com-
pany contractswith Gillespie to carry cratedgoodsto a specificdestinationfor a normal
fee of $5,000.The trucker deliversthe cratesand later finds out that thev containeclille-
gal goods.Although the shipment,use,and saleof the goodsare illegal under the law, the
trucker, berng an innocent party, normally can still legally collect the $5,000 from
Gillespie.E

Members
of Protected
Classes
When a statuteprotectsa certain classof people,a member of that classcan enforcean ille-
l
gal conlracfevenlhough the otherpartycannot.lEExAMpLiltrrl Statutesprohibitcerlain
employees(suchasflight attendants)from working more than a specifiednumber of hours

18.Atftinsy. Swimwest
FamilyFitnessCenter,2005Wl1,277 Wis.2d303,691 N.W.2d 134 (2005)
504IIEIIUEI
CONTRACTS

per month. Theseemployeesthus constitutea classprotectedby statute.An employeewho

BLUESKYI.AWS
Statelawsthat regulatethe offering
for the
and saleof securities
protectionof the public.
is recruiredto work more than the maximum can recoverfor thoseextrahoursof service.E
Other examplesof statutesdesignedto protect a particular classof people are blue sky
laws-state laws that regulatethe offering and saie of securitiesfor the protection of the
public (seeChapter 35)-and statestatutesregulatingthe saieof insurance.If an insur-
ance company violatesa statutewhen selling insurance,the purchasercan nevertheless
enforcethe policy and recoverfrom the insurer

fromanlllegal
Withdrawal Agreement
If the illegal part of a bargainhasnot ),etbeen performed,the partyrenderingperformance
can withdrawfrom the contractand recoverthe performanceor its value. lEexftvtFtr-tt.til
Marta and Amil decideto wager(il1ega1iy) on the outcomeof a boxingmatch.Each deposits
funds with a stakel-rolder, who agreesto pay the winner of the bel At this point, each party
hasperforrnedpartof the agreement,but the illegalpart of the agreementwill not occur until
the fundsarepaid to the winner. Beforesuchpaymentoccurs,eitherpartyis entitledto with-
drawfrom the agreementby givir-rgnotice to the stakeholderof his or her withdrawal.E

or Divisihle,
Severahle, Contracts
A contract that is severable,or divisible, consistsof distinct parts that can be performed
separately,with separateconsiderationprovided for eacl-rpart. With an indivisible con-
tract, in contrast,the partiesintended that completeperformanceby each party would be
essential, evenif the contractcontainsa number of seeminglyseparate provisions.
If a contract is divisible into legal and illegal portions, a court may enforce the legal
portion but not tl-reillegal one, so long asthe illegal portion doesnot affectthe essenceof
the bargain.This approachis consistentwith the basicpolicy of enforcingthe legal inten-
tions of tl-recontractingpartieswheneverpossible.trEXAMpLE It=l Cole signsan employ-
ment contractthat includes an overlybroad and thus iliegal covenantnot to compete.In
this situation,tl'recourt may ailow the employmentcontractto be enforceablebut reform
the unreasonablybroad covenant by converting its terms into reasonableones.
Alternatively,the court could declarethe covenantillegal (and thus void) and enforcethe
remainingemploymentterms.E

How do courts decide when o controct is severoble?Severabilityfrequently arisesin cases

involvingarbitrationclauses.Shoulda court strikeout illegalportionsof an arbitrationclause
and en{orcethe remainingprovisions? Thatis the fairestsolution,accordingto the U.S.Courtof
Appealsfor the ThirdCircuitin Spinettiv. ServiceCorp.Internotionol.le ln that case,a woman
suedherformeremployerfor ageandgenderdiscrimination (seeChapter al ). Thewomanhad
signeda contractin which she agreedto arbitrateany disputeswith the employer.Partof the
arbitrationclauserequiredthe employeeto paya substantial amountin feesfor the arbitration
($500 plus 93,750in filingfees,$l5O per day,and half of the arbitrator'shourlyfee of $250).
Becausethese provisionswould make arbitrationprohibitivelyexpensivefor employees,the
court held that they were unenforceable and illegal.The court notedthat two competingpub-
lic policieswere involvedhere:first,the policyof protectingemployees'abilityto enforcetheir
statutoryrightsagainstworkplacediscrimination; and second,the strongpolicyfavoringarbitra-
tion agreements. By strikingout the illegalportionsof the arbitrationclausebut still requiring
the disputeto be arbitrated, the court reasonedthat it couldfurtherboth goals.

@
ls.324F.3d212(3dCir.2003)
 I05tnnnrf;ffl
CAPACITY
ANDLEGALITY

Contr aclllegal
t s t h r o u gFhr a u dD, u r e sos r, Un d uIn
e flu e n ce
Often, one party to an illegal contract is more at fault than the other. When a party has
been induced to enter into an illegal bargain through fraud, duress,or undu€ influence
on the part of the other party to the agreement,the first party will be allowed to recover
for the performanceor its value.

ReneeBeaverstarted
racinggo-karts
competitivelyin 2005, her intentto be boundby its terms.Usingthe information
when shewas
fourteen.Many of the
racesrequiredher to sign an exculpatoryclauseto participate,
which she or her parentsregularlysigned.In 2008,right
beforeher birthday, she participated
in the annualElkhart
CrandPrix,a seriesof racesin Elkhart,Indiana.Duringthe
eventin which she drove,a pieceof foam paddingusedas a
coursebarrierwas torn from its baseand endedup on the
track.A portionof the paddingstruckBeaverin the head,and
anotherportionwas thrown into oncomingtraffic,causinga
multikartcollisionduringwhich she sustained severeinjuries.
Beaverfiled an actionagainstthe raceorganizers for
negligence.The organizerscould not locatethe exculpatory
clausethat Beaverwas supposedto havesigned.Race
iltirl:+iit:='i ffi
organizersarguedthat she must havesignedone to enterthe
race,but evenif she had not signedone,her actionsshowed
presentedin the chapter,answerthe followingquestions.
I Did Beaverhavethe contractualcapacityto enter a contract
with an exculpatoryclause?Why or why not?
2 Assumingthat Beaverdid, in fact,sign the exculpatory
clause,did she laterdisaffirmor ratifythe contract?Explain.
5 Now assumethat Beaverhad statedthat she was eighteen
yearsold at the time that shesignedthe exculpatory clause.
How might this affectBeaver'sabilityto disaffirmor ratify
the contract?
4 lf Beaverdid not actuallysignthe exculpatory clause,could
a courtconcludethat she impliedlyacceptedits termsby
participatingin the race?Why or why not?

Iq l a l e sper s onnel.
par t i c u - furniture,or automobiles,your salespersonnelmustbe care-
I r I larlythosewho arepaid ful in formingcontractswith minorsand shouldheedthe
on a cornmissionbasis,are adage,"When in doubt,check."Rememberthat a contract
often eagerto makecon- signedby a minor (unlessit is for necessaries)normallyis
tracts.Sometimes, houever, voidable,and the minor may exercisethe option to disaffirm
thesesalespersons mustdeal the contract.Employeesshoulddemandproof of legalage
with minorsand intoxicated when they haveany doubt aboutwhethera customeris a
persons,both of whom havelimited contractualcapacity. minor. If the customeris a minor, the employeesshouldinsist
Therefore,if you are a retailer,you shouldmakesurethat that an adult (suchasa parent)be the purchaseror at least
your employeesare acquaintedwith the law governing cosignan1salescontract.
contractswith minorsand intoxicatedpersons. In addition,becausethe law governingminors'rightsvaries
substantiallyfrom stateto state,you shouldcheckwith your
Contracts
withMinors attorneyconcerningthe lawsgoverningdisaffirmance in your
state.You and thoseyou hire to sell your productsshould
If your businessinvolvessellingconsumerdurables,such as
know,for example,what the consequences will be if a minor
Iarge-screentelevisions,
entertainmentcenters,appliances,
* ThisApplicationis not meantto substitute{or the servicesof an attorneywho is licensedto practicelaw in your state.

(Continued)
106llNilur
CONTRACTS

disaffirmsthe saleor hasmisrepresented l-risor her agewhen
forminga salescontract.Similarly,you needto find out
whetherand in what circumstances a minor, on disaffirminga
contract,can be requiredto pay for damageto goodssoid
under the contract.
Persons
withIntoxicated
Dealing
Little needbe saidabouta salesperson's dealingswith obvi-
ouslyintoxicatedpersons.If the customer,despiteintoxica-
tion, understands the legalconsequences ofthe contract
beingsigned,the contractis enforceable. Nonetheless, it may
be extremelydifficult to establishthat the intoxicatedcus-
tomer understoodthe consequences of enteringinto the con-
tract if the customerclaimsthat sheor he did not understand.
Therefore,the bestadviceis, "When in doubt,don't." In
otherwords,if you suspecta customermay be intoxicated,do
not signa contractwilh that customer.
CHE CK LFI S OTRT HERE T A I T E R
l Whenin doubtaboutthe ageof a customer to
whomyouareaboutto sellmajorconsumer durable
goodsor anythingotherthan necessaries, require
proofof legalage.
2 lf suchproofis not forthcoming,requirethat a parent
or guardiansignthe contract.
5 Checkwith an attorneyaboutthe lawsgoverning
minors'contractsin yourstate.
4 Do not signcontracts with intoxicated
customers.

adhesioncontract299 288
disaffirmance ratification291
bluelaws 295 emancipation288 reformation298
blueskylaws 504 employmentcontract297 unconscionablecontract
capacity287
contractual clause501
exculpatory or clause298
covenantnot to compete297 289
necessaries usury 294

CAPACITY
CONTRACTUAT
Minors A minor is a personwho has not yet reachedthe age of majority.ln most stategthe age of
(Seepages288-292.) majorityis eighteenfor contractpurposes.Contractswith minorsare voidableat the option
of the minor.
1. Disoffirmance-Thelegal avoidanceof a contractualobligation.
a. Disaffirmancecan take place(in most states)at any time duringminorityand within a
reasonabletime afterthe minor has reachedthe age of majority.
b. lf a minor disaffirmspart of a contract,the entirecontractmust be disaffirmed.
c. When disaffirmingexecutedcontracts,the minor has a duty to returnreceivedgoodsif they
are still in the minor/scontrolor (in some states)to pay their reasonablevalue.
d. A minor who has committedan act of fraud (suchas misrepresentation
of age)will be
deniedthe rightto disaffirmby some courts.
but remainsliablefor the reasonablevalue
e. A minor may disaffirma contractfor necessaries
of the goods.
2. Ratificotion-The or affirmation,of a legalobligation;may be expressor implied.
acceptance,
when the minor,througha writing or an oral agreement,explicitly
a. Expressratification-Exists
assumesthe obligationsimposedby the contract.
 IO7GINEEN
CAPACITY
ANDLEGALITY

Minors-Continued b. lmpliedratification-Existswhenthe conductof the minoris inconsistentwith disaffirmance

or whenthe minorfailsto disaffirm an executed contract
withina reasonable time after
reaching the ageof majority.
3. Porents'liability-Generally,
exceptfor contractsfor necessarietparentsarenot liablefor the
contracts madeby minorchildrenactingon theirown,norareparentsliablefor minors'torts
exceptin certaincircumstances.
4. Emancipotion-Occurs whena child'sparentor legalguardian relinquishes
the legalrightto
exercise controloverthe child.Normally, a minorwho leaveshometo supportiimselfor
herselfis consideredemancipated. In somejurisdictions,
minorsthemselves arepermitted to
petitionfor emancipation for limitedpurposes.
lntoxicatedPersons l. A contractenteredintoby an intoxicatedpersonisvoidableat the optionof the intoxicated
(Seepage292.)
Personif the personwassufficiently
intoxicated
to lackmentalcapacity, evenif the intoxication
wasvoluntary.
2. A contractwith an intoxicated
personis enforceableif, despitebeingintoxicated,the person
understood the legalconsequencesof enteringintothe contract.
Mentally l. A contract judgedbya courtto be mentallyincompetent
madeby a personpreviously is void.
IncompetentPersons
(Seepbges292-293) 2. A contract
madeby a mentallyincompetent personwhoma courthasnot previously declared
to be mentallyincompetent
is voidableat the optionof the mentallyincompetent
person.
LEGATITY
Contracts 'l. Usury-Usury occurswhena lendermakesa loanat an interestrateabovethe lawful
Contraryto Statute maximum.Themaximumrateof interestvariesfrom stateto state.
(Seepages293-297.)
2. Oambling-Cambling contracts that contravene(go against)statestatutesaredeemedillegal
andthusvoid.
3. Sobboth(Sunday)/ours-These lawsprohibitthe formationor performance of certaincontracts
on Sunday.Suchlawsvarywidelyfrom stateto state,and manystatesdo not enforcethem.
4. Licensingsfotufes-Contracts enteredinto by personswho do not havea license, when one is
requiredby statute,will not be enforceableunlessthe underlying purposeof the statuteis to
raisegovernment revenues (andnotto protectthe publicfromunauthorized practitioners).
ContractsContrary 'l. Contracts in restrointof trade-Contractsto reduceor restrainfreecompetitionareillegaland
to PublicPolicy prohibitedby statutes. An exceptionis a covenantnot to compefe.lt is usuallyenforcedby the
(Seepages297-303.) courtsif the termsaresecondary to a contract(suchasa contractfor the saleof a business or
an employment contract) andarereasonable asto timeandareaof restraint. Courtstendto
scrutinizecovenants notto competecloselyand,at times,mayreformthemif theyare
overbroad ratherthandeclaring the entirecovenant unenforceable.
2. Unconscionoble contractsond clouses-When a contractor contractclauseis so unfairthat it is
oppressive to one party,it maybe deemedunconscionable; assuch,it is illegalandcannotbe
enforced.
3. Exculpotory c/auses-Anexculpatory clauseis a clausethat releasesa partyfrom liabilityin the
eventof monetary or physicalinjuryno matterwho is at fault In certainsituations,exculpatory
clausesmaybe contrary to publicpolicyandthusunenforceable.
EFFECT
OFIttEGAtITY
GeneralRule In general,
an illegalcontract
is void,andthe courtswill not aideitherpartywhenbothparties
(Seepage303.) areconsideredto be equallyat fault(n pori delido).lfthe contract
is executory
neitherpartycan

(Continued)
308IM
CONTRACTS

GeneralRule- enforceit. lf the contractis executed,there can be neithercontractualnor quasi-contractual

Continued recovery.
Exceptions Several
exceptions existto the generalrulethat neitherpartyto an illegalbargainwill be ableto
(See'pages
303-305.) recover.In the followingsituations,the court may grant recovery:
1. Justifiobleignoronce of the focts-When one pafi to the contractis relativelyinnocent.
2. Members of proteded c/osses-Whenone party to the contractis a member of a group of
personsprotectedby statute,such as employees.
3. Withdrawolfrom an illegol ogreemenf-When either party seeksto recoverconsiderationgiven
for an illegalcontractbeforethe illegalact is performed.
4. Severable,or divisible, contracts-Whenthe court can divide the contractinto illegal and legal
portionsand the illegalportion is not essentialto the bargain.
5. Fraud,durest or undue influence-When one party was induced to enter into an illegal
bargainthroughfraud,durest or undue influence.

questionsin this tot Reviewsectioncanbe foundon this text'saccompanying

Answersfor the even-nambered Website ot
Select"ChopterII" ond click on "For Review."

I What are someexceptionsto the rule that a rninor can disaffirm(avoidlany contract?
2 Does an intoricatedpersonhavethe capacityto enter into an enforceablecontract?
5 Does the mental incompetenceof one partynecessarily
make a contractvoid?
When will such covenantsnot be enforced?
4 Under what circumstanceswill a covenantnot to competebe enforceable?
5 What is an exculpatoryclause?In what circumstancesrnight exculpatoryclausesbe enforced?When will they not be
enforced?

HypoTHETrcAr AND
scENARros pRoBtEMs
cAsE
ffi
n ?.tr Contractsby,Minors. Kalen is a seventeen-year-old minor u'ho
has just gracluatedfrom high school. He is attending a univer-
sity trvo hundred rniles from home and has contractedto rent
an apartmentnear the universityfor one yearat $500 per
month. He is working at a conveniencestoreto earn enough
income to be self-supporting.After living in the apartment and
paying monthly rent for four n-ronths,he becomesinvolveclin a
disputewith his landlord.Kalen,still a minor, movesout and
rehrrnsthe key to the landlord. The landlord wants to hold
Kalen liable for the balanceof the paymentsdue under the
lease.Discussfully Kalen'sliabiliq, ir-rthis situation.
I l,? HypotheticalQuestionwith SampleAnswer. A famous Nerv
York City hotel, Hotel Lux, is noted for its food as well as its
luxury accornrnodations. Hotel Lux contractswith a famous
chef, Chef Perlee,to become its head chef at $6,000per
nonth. The contractstatesthat should Perleeleavethe
enployment of Hotel Lur for any reason,he rvill not work as
a chef for any hotel or restaurantin New York, New Jersey,or
Pennsylvaniafor a period of one year.During the first sir
rnonthsof the contract,Hotel Lur extensivelyadvertises
Perleeas its head chef, and businessat the hotel is excellent.
Then a disputearisesbetweenthe hotel l-ranagementand
Perlee,and Perieeterminateshis employment. One month
later, he is hired by a farnousNew )erseyrestaurantjust
acrossthe New York stateline. Hotel Lux learnsof Perlee's
employn.rer.rt througl-ra large advertisementin a New York
City newspaper.It seeksto enjoin (prevent)Perleefron.r