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Lawful Objective

The fourth element of a contract is that it must be made for a lawful objective. Courts will not enforce contracts that are illegal or violate public policy.  Such contracts are considered void. For example, a gambling contract would be illegal in many states.

If the illegal agreement has not been performed, neither party has the right to sue the other for damages or to require performance of the agreement.  If the agreement has been performed, neither party can sue the other for damages or to have the agreement set aside. 

Jones was asked by Smith to find a buyer for his restaurant in exchange for a payment of 15% of the sales price if Jones found a buyer. Jones did not have a real estate license nor did he claim to have one.  Jones obtained a buyer and was paid one-half of the commis­sion.  Smith refused to pay any more commission saying that he did not have to since Jones did not have a realtor’s license as required by state law. Is Smith correct? Smith also said that Jones had to return the part of the commission that he had already paid to Jones. Is this correct?

Smith is correct about not having to pay Jones the rest of the commission since the state licensing statute was violated by Jones acting as a realtor without a license.  Smith’s agreement to pay Jones a commission was void and can not be enforced.  However, Smith is incorrect regarding his contention that Jones has to pay back the part of the commission Smith paid to Jones. A court will not help either party enforce an illegal contract. In most cases, parties to an illegal agreement are denied remedies of any nature.  A Court will not require parties to perform an illegal agreement, and a Court will not award damages because a party fails to perform.

An agreement may involve the performance of several promises, some of which are legal and some illegal.  The legal parts of the agreement may be enforced if they can be separated from the parts that are illegal.  However, if the illegal parts would be such as to affect the whole agreement, the legal parts of the agreement will not be enforced.  When possible, an agreement will be interpreted as being lawful.  In other words, if an agreement is susceptible to two interpretations, one legal and the illegal, the Court will generally use the legal interpretation unless it is clear that the interpretation as to illegality is very clearly indicated.

An agreement which calls for the commission of a crime is illegal and therefore void.  For example, a person could not enforce an agreement with another party to burn a house down.  Also, an agreement that calls for the commission of a civil wrong (such as a tort) is illegal and void.  For example, an agreement to slander a third party is void. 

Ordinarily, a Court will not consider whether a contract is fair or unfair, wise or foolish.  However, in some instances, Courts will hold that a contract will not be enforced because it is too harsh or oppressive to one of the parties.  For example, a clause in a contract which provides that a party will pay a large penalty if he breaks the contract may be unenforceable, depending upon the circumstances.  Another example would be a situation where one party agreed that the other party would not be liable for the consequences of gross negligence.  This type of agreement would usually be void as against public policy.

Agreements that may harm the public welfare are contrary to public policy and are not binding.  An agreement may not violate a statute, but it still may be so offensive to society that courts will rule that to enforce it would be contrary to public policy.  Whether or not a contract is contrary to public policy is difficult to determine because the term “public policy” is difficult to define.  The concept of public policy has to do with protecting the public from something that tends to be injurious to the public, or contrary to the public good, or which violates an established interest of society. Contracts which violate public policy frequently relate to the protection of the public welfare, health or safety; to the protection of the person; or the protection of recognized social institutions.  For example, a contract that would prohibit some­one from marrying would be unenforceable as violating public policy.

An agreement which would require a person to lose some sort of statutory protection would be in violation of public policy.  For example, state insurance statutes frequently provide that policies of a certain type (e.g., medical) must contain certain benefits.  An insurance policy which fails to supply such benefits would violate public policy as declared in the statute.

An agreement which interferes with the proper performance of a duty of a public officer is contrary to public policy and void.  An example would be an agreement between a mayor and a private citizen where the private citizen agreed to pay the mayor $10,000.00 if the mayor would hire the citizen’s son as his executive assistant.

Agreements involving conflicts of interest can be void as violating public policy such as when a purchasing officer of a government buys from a company that the officer privately owns.

Any agreement intended to obstruct the process of law is void as being contrary to public policy.  Suppose for example, in a medical malpractice case, an attorney offered to pay his expert witness, a physician, $10,000.00 for testifying, and an additional $15,000.00 if the attorney’s client wins the case. This agreement would be void.  The danger is that a witness might lie in order to help win the case.

Most states provide that gambling contracts are illegal.  Lotteries which involve the element of a prize, chance, and consideration are also held to be held illegal.  Of course, a state may allow a lottery run by the state or may legalize gambling in general, such as in Nevada. In some states, bingo games, lotteries, and raffles are legal if the proceeds go to charity. Giveaway plans and games are lawful as long as it is not necessary to buy anything or give anything of value in order to participate.  If participation is free, the element of considera­tion is not present and therefore there is no lottery.

Statutes frequently require that a person obtain a license or certificate before practicing certain professions such as law or medicine, or before carrying on a particular business such as that of a real estate broker or stock broker.  If the license is required to protect the public from unqualified persons, such as an unlicensed physician, any contract made by the unlicensed person in the course of his medical practice would be void.  In a North Carolina case, a statute required that contractors be licensed.  An unlicensed contractor entered into a contract to make repairs.  The Court held that the contractor could not recover from the owner either the price agreed to in their contract or the reasonable value of the services actually performed since the contractor was unlicensed.

If a license is strictly a revenue raiser, such as a privilege license to conduct a store at a particular location, it would be rare for an agreement made in violation of the licensing statute to be held invalid.  Someone operating a store without a permit would not have all of its sales declared void, but it might be fined for failure to obtain the appropriate license.

When a businessman sells his business, he may compete with the buyer of his business unless there is a valid restrictive covenant or covenant not to compete.  The same is true when an employee leaves the employ of a company and begins soliciting customers of his former employer.

When an ongoing business is sold, it is commonly stated in the sales contract that the seller shall not go into the same area or a similar business again within a certain geographical area or for a certain period of time or both.  Such an agreement is valid and enforceable.

Restrictions to prevent competition by a former employee are held valid when they are reasonable and necessary to protect the interests of the employer.  For example, a provision in an employ­ment contract which prohibited an employee for two years from calling on any customer of the employer called on by the employee during the last six months of employment would generally be valid.  Courts will closely examine covenants not to compete signed by individuals in order to make sure that they are not unreasonable as to time or geographical area.  For example, suppose a company only operated within a certain city, and the covenant not to compete provided that an employee of the company could not solicit business in the city or within 100 miles of the city if he ever left the employ of the company. Such an agreement would be unreasonable as to its geograph­i­cal area.  The company had no need to be protected regarding such a large geographical area. 

An agreement between a doctor and a clinic that if the doctor leaves the employ of the clinic, he will not practice within the city in which the clinic is located for the remainder of the doctor’s life would be unrea­sonable as to time.  Courts may also look to public welfare.  If the city needed more than one doctor (assuming there was just one), the Court might declare the restriction as contrary to public policy.

When a restriction of competition is invalid because it is too long or covers too great a geographical area, Courts will generally do one of two things.  Some Courts will trim the restrictive covenant down to a period of time or geographical area that the Court deems reasonable.  Other Courts refuse to enforce the restrictive covenant at all and declare it void.

Inside Lawful Objective