Chapter 15: Illegality
Written Homework Solution

E. Klugman © 2011

1.       Name the general rule regarding how a court treats parties to an illegal contract where one of them subsequently sues the other for breach of contract.            

Answer:  Generally, the courts will give no remedy to parties who have entered into an illegal contract where a “breach” of its terms has subsequently occurred.


2.       List the exceptions to the rule stated above.          


·Where a party has rescinded the contract prior to the doing of an illegal act, he/she may be able to get damages (i.e. a refund of the money they put in)

·Where the parties are not in parti delicto (equally guilty) but, in fact, there is a very large difference in degree of wrong-doing between them.

 Where one party was excusably ignorant of the illegality (in which case he/she can receive damages up to and through the time when they were excusably ignorant.  IF he stayed on after discovering the illegal nature of the contract, he will not be able to recover for that period…)

Where both parties were excusably ignorant

Where a party enters into a valid and legal contract with someone else but they know or may have known that the other party was using their otherwise legal service, say, for illegal purposes, but the party suing for breach did not benefit from or participate in the illegality, itself.


 Where the contract is divisible (& the illegal portion can be separated out)



3.       Define what an exculpatory clause is.  Under what circumstances does a court limit their application (when will a court refuse to apply it)?

Answer:  A contract provision which releases another from any liability for damages arising from the other party’s negligence in performing the contract.

The courts will not enforce it as to any intentional wrongs (i.e. fraud, battery, etc.)  Some states, like California, also will not allow parties to escape liability for gross negligence. (i.e. drunk driving would be an example of gross negligence – getting distracted by a good looking member of the opposite sex while driving is an example of negligence where it results in an accident…)

 Also, some kinds of parties cannot contractually exculpate themselves from liability for negligence:

 ·       Medical care providers & hospitals

·       Common carriers (public transportation providers)

·       Parties that render a public duty/service (not that they merely sell to or interact with the public)

·       Those who have a statutory duty toward another (i.e. parent to child, employer to employee re: maintaining a safe workplace; landlord to tenant re: keeping common areas in safe repair, etc.)



 4.       Define ancillary covenants against competition.  Under what circumstances are they upheld?  (I’m looking for the rule/formula which the courts use in scrutinizing such provisions).

Answer:  Anti-competition clauses that are part of a greater legitimate agreement.  (They cannot stand alone –i.e. be the sole reason/purpose of the parties’ agreement.)

 They are typically found in either employment contracts or in contracts in which one person is selling their business to another (buy-sell agreements).  If upheld, they must bear a reasonable relationship to a legitimate interest owed to the party who drafted that clause and must be no greater than necessary in scope (breadth of what is being restricted), time, and geographic area.  In addition, there must be no over-riding public policy at stake.



5.       Are there certain kinds of covenants against competition which the courts refuse to enforce?  Which kinds?


Some courts refuse to enforce them in employment contracts, even if the restrictions appear reasonable on their face.  (California, for example, by statute, prohibits any such restriction.)

 Even in those jurisdictions which uphold them in employment contracts, common callings are exempt from any such restrictions.  (Review your text for why.)

 Finally, sometimes an otherwise reasonable restriction will be void or unenforceable because the public interest is better served by competition in that area.  (i.e. a covenant against competition in a medical employment agreement between hospital & doctor where there aren’t enough doctors in that sparsely populated state…)



 6.       Define the difference between violators of revenue raising licensing statutes and violators of regulatory licensing statutes and its impact on that violator’s attempt to enforce a contract with another for whom they provided an (unlicensed) service?

Answer:  Those who have violated a “revenue raising licensing statute” have merely failed to pay fees whose purpose is to provide money for the government entity giving out those licenses.  If someone has violated a revenue-raising licensing statute by failing to obtain that kind of license, it will not preclude them from enforcing an otherwise valid contract for those services.

 On the other hand, where someone has failed to get a license that is required by a regulatory kind of licensing statute, because the public interest involved in regulating that kind of person’s activities/services is so strong (usually public health, safety or welfare concerns), that unlicensed person will not be able to enforce a contract for such services with another person – even if properly performed!

 A good example of the latter is where someone in the state of California provides contractor’s services for building an addition to someone’s house, but they are not a licensed contractor.


7.       When is a contract unconscionable?  Are all “one-sided” contracts unconscionable?

Answer:  A contract (or provision within that contract) must be SO grossly unfair that it “shocks the conscience of the court” (a difficult thing to do, as they’ve seen it all)!

 One-sided contracts (take-it-or-leave-it contracts), called “contracts of adhesion” are not automatically unconscionable.  Some states deem that contracts of adhesion raise a rebuttable presumption of unconscionability – in California, this is not the case.  A contract of adhesion is not presumptively unconscionable.  To be unconscionable it must meet the definition/tests described here & in your text.



8.       “A” sues “B” for breach of contract for services that in themselves, were legal, but that “B” then used for illegal purposes. “B” raises the defense that the contract is illegal, and therefore void.  If “A” shows that she was perhaps aware that the other party might have been engaged in something illegal but that she herself did not benefit from or participate in the illegality, will she be able to recover damages for breach of contract?

Answer:  Yes.  As long as the services/goods she provided were, themselves, legal, she is not responsible for or tainted by the other party’s subsequent illegal use for them…as long as they didn’t directly benefit from (i.e. take a percentage cut of) or participate in the illegality/fruits of the illegality.