Week 6 - AEM 3200 WEEK 6 Contract Illegality I Contract...

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AEM 3200 WEEK 6 – Contract Illegality I. Contract Illegality i. The subject of a contract must be legal. The general rule for an illegal contract is for the contract to be ruled void. ii. There are exceptions where an illegal contract is not automatically void but is instead voidable (generally when one party is more at fault than the other). 1. Where statute protects one part, the contract can be enforced by that innocent party, but not the party acting illegally. 2. Where the contract was induced by fraud, duress, undue influence, (all improper acts). There was improper assent to the contract so it can be avoided by the victim but not the wrong-doer. 3. Where either party withdraws from an illegal contract before it is performed. The law will return each party to the position they were in before the contract Example: An illegal gambling contract for a horse race can be cancelled before the race is run, so the wager will be returned. 4. When one party is unaware of the illegality and acts honestly in good faith. The innocent party can enforce for their own honest performance. Example: Trucking Company contracts to transport sealed containers. The crates turn out to contain cocaine. Transportation is therefore illegal. But as the trucking company had no knowledge of the contents of the containers, it can enforce the payment for its trucking service. II. Partially legal contracts- against public policy i. Can you separate the legal from the illegal substance of a contract (i.e. sever the illegal part and enforce only the legal part?) It is a question of fact in each case, depending upon the extent to which the legal and illegal parts are dictinct. The count looks for separate consideration for legal and illegal portions of the contract. ii. What is “illegal”? 1. Any contract that violates a statute. 2. Any contract that violates public policy. iii. Who determines public policy? 1. The legislature when it passes policy. 2. Otherwise , the court. 1
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AEM 3200 WEEK 6 – Contract Illegality a. Diosadado v. Diosadado – Husband and wife have marriage problems. The parties decide that a financial penalty (around $50,000) must be imposed if anyone commits adultery. In California, no blame is assigned under no fault divorce. Therefore to assign a financial penalty for adultery undermines the public policy of the state of California. Other states may rule differently under a similar set of facts. III. Usury ( ): Charging more than the legal rate of interest. The legal rates are set by statute as with a specified rate, or a variable rate set by reference to a particular index figure. i. Criminal Usury is where the rate is so high that it is criminal (such as loan sharking). The rate of criminal usury in New York State is over 25% per year. ii. If the legal rate of interest is exceeded, the outcome can vary depending on the state and/or the lender.
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