11.2: Agreements in Violation of Statute
- Page ID
- 143338
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)LEARNING OBJECTIVES
- Understand that various types of bargains may be made illegal by statute, including gambling, some service-for-fee agreements involving unlicensed practitioners, and usury.
- Recognize that while gambling contracts are often illegal, some agreements that might appear to involve gambling are not.
Overview
Not every agreement is legally enforceable. Even when the parties mutually assent and provide consideration, the law will not uphold certain bargains because they violate statutes designed to protect the public. These statutes reflect the legislature’s determination that some agreements are contrary to public health, safety, morals, or welfare.
The most common categories of bargains made illegal by statute include:
- Gambling contracts
- Sunday contracts (blue laws)
- Usury
- Unlicensed services
Types of Bargains Made Illegal by Statute
1. Gambling Contracts
General Rule: Gambling contracts are generally unenforceable. A gambling contract is one in which the parties wager on the outcome of an uncertain event outside their control. Courts have long refused to enforce these agreements because gambling can encourage addiction, attract organized crime, and lead to financial ruin.
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What counts as gambling?
Betting on roulette, poker, or the outcome of a horse race or football game. -
What does not count as gambling?
Agreements involving risk but structured as legitimate bargains.- Example (not gambling): A gardener agrees to maintain an elderly client’s lawn for the rest of the client’s life in exchange for an upfront payment. The duration of the service is uncertain, but this is a life-service contract, not gambling.
- Example (not gambling): A father promises to pay his daughter $50 if she earns an “A” in chemistry. This is a unilateral contract: the daughter controls the outcome through effort, not chance.
Exceptions:
- Securities: Buying stock in a corporation is speculative but socially useful; it encourages investment and entrepreneurship.
- Insurance: Risk-based, but enforceable only when the buyer has an insurable interest (e.g., life insurance on your spouse, not on a stranger).
2. Sunday Contracts (Blue Laws)
Background: Historically, many states enacted “blue laws” prohibiting contracts, sales, and other business transactions on Sundays, reflecting religious and cultural traditions of the time.
- Early blue laws restricted work, travel, sports, entertainment, and trade on Sundays.
- Exceptions often included contracts for necessities, marriage, or charitable purposes.
- These laws were widely enforced in the 18th and 19th centuries.
Modern Trend: Most blue laws have been repealed or fallen into disuse as society shifted toward consumer convenience and secular values. However, remnants remain in some states.
- Example: Until 2008, Washington State prohibited the sale of hard alcohol on Sundays. The law was repealed primarily to generate additional tax revenue.
- Example: Some counties in Texas and Indiana still limit alcohol sales on Sundays, a lingering effect of blue law traditions.
3. Usury
Definition: Usury occurs when a lender charges interest in excess of the maximum rate permitted by state law. Usury statutes aim to protect borrowers from exploitative lending practices.
Penalties: Vary by jurisdiction and may include forfeiture of:
- Only the interest,
- Both interest and principal, or
- In extreme cases, statutory penalties against the lender.
Modern Developments:
- Many states have relaxed usury laws to accommodate modern lending practices, especially for credit cards and corporate loans.
- Some high-interest loans (payday loans, pawnshop loans) operate under statutory exceptions.
Key Case: Marquette National Bank v. First Omaha Service Corp. (1978)
- The U.S. Supreme Court ruled that national banks may charge the highest interest rate allowed in their home state, even to borrowers in stricter states.
- Example: Citibank moved its credit card operations to South Dakota (which had no usury cap) to escape New York’s strict limits.
Practical Example: If a payday lender charges 30% interest in a state with a 20% cap, the loan may be unenforceable. However, if issued by a national bank in a state with no cap, the interest may be legal under Marquette.
4. Licensing Statutes
States require professional licenses for many occupations. The effect of failing to hold a license depends on whether the statute is regulatory or revenue-raising.
- Regulatory Licenses (Protecting the Public):
- Designed to safeguard health, safety, and welfare by ensuring competence.
- Professions: lawyers, doctors, accountants, electricians, contractors.
- Rule: A person without a required regulatory license generally cannot enforce a contract for services.
- Example: An unlicensed electrician performs wiring in a home. Even if the work is excellent, the electrician cannot sue for payment because the licensing requirement protects public safety.
- Revenue Licenses (Raising Funds or Recordkeeping):
- Require only a fee and registration, not proof of skill or training.
- Professions: taxi drivers, milk delivery services, street vendors.
- Rule: Failure to obtain a revenue license does not always bar recovery; courts may allow collection once the license is obtained.
- Example: A vendor who fails to renew a city business license may still collect payment for goods already delivered, since the license is mainly for revenue purposes.
Analysis Framework for Courts:
- Is a license required by statute?
- Does the statute expressly prohibit recovery without a license?
- If silent, is the license regulatory (bar recovery) or revenue-raising (may allow recovery)?
KEY TAKEAWAY
Statutory illegality covers contracts made unenforceable by specific laws, such as gambling prohibitions, blue laws, usury caps, and licensing requirements. Courts distinguish between bargains that pose risks society has chosen to tolerate (like securities and insurance) and those that undermine public policy. The effect of illegality varies: some contracts are void outright, while others may allow limited recovery, especially where fairness or restitution concerns apply.
EXERCISES
- List the typical kinds of contracts made illegal by statute.
- Why are some practitioners completely prohibited from collecting a fee for service if they don’t have a license, and others allowed to collect the fee after they get the license?
- If no competency test is required, why do some statutes require the practitioner to be licensed?