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Contracts II
University of Mississippi School of Law
Barnes, Richard L.

Contracts II

Public Policy
There are times when the result is Unconscionable w/o looking at procedural terms. Against public policy b/c it’s illegal and criminal act. If it’s in violation of criminal law, then it’s against public policy and unenforceable.

The contract does not necessarily have to be illegal or conduct illegal business. Contract may be deemed unenforceable on public policy grounds if it facilitates illegal conduct (civil violation).

Problems of illegality in K’s generally deal with the subject matter of the K rather than the conduct of the parties. If the conduct of the parties is illegal, other areas of the law generally apply, e.g., criminal law or torts.

1. Subject Matter Illegality
a. Legal at time of offer. If the subject matter of a K is legal at the time an offer is made, but becomes illegal before acceptance, the illegality terminates the offer as a matter of law.
b. Legal at time of offer and acceptance. If the subject matter is legal at the time of offer and acceptance, but subsequently becomes illegal, the K is discharged under the doctrine of impossibility of performance.
c. At all time illegal. If the subject matter of a K (either the consideration or the object of a K) is illegal, it is an illegal K. Generally, illegal private agreements are classified as such either b/c they are expressly prohibited by law (e.g., K’s in restraint of trade, gambling K’s, usurious K’s) or b/c they violate public policy (e.g., champerty, maintenance and barratry, K’s to defraud others).
2. Effect of Illegality.
a. Illegal part severable. If the subject matter is only partly illegal and the K is severable, the legal part will be enforced.
b. Culpability of Parties.
1) In pari delicto. If the parties are in pari delicto, i.e., both are equally culpable, the courts generally will not aid either wrongdoer: executory K’s may not be enforced; benefits conferred or damages sustained under executed K’s may not be recovered.
2) Not in pari delicto. When the parties are not in pari delicto, recovery of the value of benefits conferred depends upon the wrongfulness of the K. Those in the class intended to be protected by a statute are usually not considered in pari delicto.
a) Malum in se. If a K is malum in se (against good morals), courts will not aid the less culpable party on the rationale that the policy of discouraging such transactions outweighs the possible injustice b/t private parties.
b) Malum prohibitum. Where a K is malum prohibitum (violates some statute or regulation but is not against good morals), courts will not enforce the K, but may allow recovery by the less culpable party for benefits conferred.

o Bovard v. American Horse – outer limit on gray-scale of enforceability and unenforceability—Boverd agreed to sell business. D in business of manufacturing jewelry and drug paraphernalia. Trial court held public policy was against manufacture of drug paraphernalia even if it was not illegal at the time the parties entered the K. Held that consideration in K was contrary to public policy, so the K was illegal and void. p appeals. Statute says can’t sell it but doesn’t say that you can’t manufacture the paraphernalia. (sale wasn’t illegal upon entering K but later became illegal) THE MANUFACTURE OF THIS PRODUCT FURTHERS AND AIDS THE VIOLATION OF PARAPHERNALIA PROHIBITION.
o A contract for the sale of a business engaged in legal activity whose products are used primarily for illegal purposes is contrary to public policy and therefore enforceable.
o No special interest in the court enforcing the K apart from general interest preventing D from avoiding a debt. Both are bad guys, drug use is bad for society. Both knew product would be used for illegal purposes—Morality is a big issue.
o A finding of in pari delicto leaves the parties “as they stand” where you are and will not interfere—one wins while the other loses, which is an enormous forfeiture depending on which party provided the money first. (the party w/ bad deal gets hosed b/c K can’t be enforced). When court finds K is illegal it has duty to refrain from enforcing it. A court must apply subjective judgment in determining whether a K violates public policy and should be cautious in making such a determination. Factors Courts should consider include:
§ The nature of the conduct
§ The extent of public harm that may be involved
§ The moral quality of the conduct of the parties light of the prevailing standards of the community
Courts rarely interfere if in pari delicto where both parties clearly violating the law—usually don’t award restitution (maybe basic restitution if not in pari delicto–equal guilt”)

Moran v. Harris—fee splitting agreement (lawyers). Such agreements were not precluded by a rule of professional conduct when they entered the agreement, but were precluded when settled and the fee splitting agreements were later allowed. Court enforced agreement on ground that public policy at time of litigation permitted agreemnent

X.L.O. Concrete v. Rivergate Corp. – “The Club” of NY concrete companies—entered construction K as a subcontractor to D, p fully performed and sought pymt. Of balance of 844,000. D refused to pay on gorund that K was part of an extortion and labor bribery operation known as “club” which was run by organized crime family (Commission). The Commission decided which companies would be allowed to work on contruction jobs worth more than 2 million. The successful contractors would pay them 2% of K price for guaranteed “labor and peace”. p was a member of the club, D knew about the club and its rules. (price-fixing)
· A p may have recourse to the courts for nonpayment of a K that was awarded in violation of anti-trust law.
o Antitrust defenses are not favored b/c they are too likely to enrich parties who benefit from the K.
o A K that is legal on its face and doesn’t require unlawful conduct in its performance is not voidable simply b/c it resulted from an antitrust conspiracy.
o Additionally, the equities of the parties must be examined. Courts should avoid upholding antitrust defenses in K cases where doing so would work a substantial forfeiture on one party while unjustly enriching the other…A relevant consideration is whether sustaining the illegality defense would render the K void in its entirety or whether recovery could still be had on a qu

if covenant was more restrictive than necessary to protect the employer’s business interests then it was entirely void.
o Judicial modification (modern trend):
§ Blue pencil rule—simply delete the unreasonable restrictions and enforce what remains (simple but can result in destruction of K) Take away but not add anything new
§ Rule of Reason (better approach)—courts enforce the covenant to the extent necessary to protect the employer’s interest w/o imposing an undue hardship on the employee. Can write a new rule (this only applies to covenants not to compete, not K’s generally)—this partial enforcement doesn’t constitute making a new K. (dissenter in CAB—although unreasonably broad, the court has no business in writing a new K for the parties
Policy reasons against 2 and 3 above—don’t want the atty’s to push envelope and don’t want courts to rewrite K’s (b/c if know cts. Will read in reasonableness, people may breach intentionally—deter b/c individuals know if it’s either all or nothing then less likely to breach).
Pre-Nuptial Agreements
· Not at arms length à adhesion à must be bargained for
· Not a violation of public policy as long as full/fair disclosure of financial resources (b/c in position of mutual trust w/ one another)
o Ex. Simeone v. Simeone—neurosx and nurse—husband presented w/ prenup night before wedding. Nurse signed and married next day, 7 yrs. Later they file for divorce and p sought alimony—agreement upheld. Wife claims it was invalid b/c she didn’t consul w/ independent legal counsel.
§ Public policy does not require that to be enforceable the prenup must make reasonable provisions for the spouse.
· Does require full and fair disclosure of the parties’ financial positions and statutory rights being relinquished. (says no longer stereotypes—men and women now have equal status in modern society and no longer have to exam the reasonableness of the prenup agreements)

Section 1:
Remedies for Breach

I. Remedies for Breach – Generally

Remedies for breach of K are designed to provide relief to the aggrieved party.

Courts make four fundamental assumptions when enforcing promises:
1. Relief of promisee is to redress breach.
2. Relief granted to promisee should attempt to put promisee in the position they would have been in had the promise been performed. § 347
3. The appropriate form of relief is substitutional rather than specific.
4. Punitive damages cannot be awarded for a breach of K.

Generally, relief for breach of K is either:
o Specific – (equitable relief) – when it secures to the promisee that which was promised, OR
o Substitutional – (damages) – when it provides a substitute for that which was promised.