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What is the requirement that a contract have a “lawful purpose”?
A contract must have a lawful purpose to be enforceable. That is, the contract cannot violate or cause others to violate the law or public policy.
Crimes and Torts – Contracts that require commission of a crime or tort or violate accepted standards are void. If a contract has both legal and illegal provisions, a court will often enforce the legal provisions and refuse to enforce the illegal ones.
Unconscionable Contracts – An unconscionable contract is one that is so unfair that it is said to “shock the conscience”. Unconscionability is broken down into “substantive unconscionability” and “procedural unconscionability”.
Substantive Unconscionability – This means that the terms of the agreement are so extremely unfair or one-sided in favor of a party that it is unlikely that the other party to the agreement understood its terms.
Procedural Unconscionability – This refers to the conditions under which the contract was formed. The terms of the contract may indicate that one party was taken advantage of by another party with greater bargaining power. Such a contract may be void as against public policy if the circumstances indicate that a reasonable person would not have entered into the agreement without the existence of an undue hardship. In some situations, the undue hardship must have been brought on by the party unduly benefited by the contract.
Contracts that Restrain Trade – Contracts that restrain trade may be illegal and thus void. This is true for contracts that create a monopoly, fix prices, and divide up markets. This is generally the area of antitrust law. A court may also find a contract void if it serves to frustrate economic activity in a manner not covered by antitrust law or it intentionally interferes with contractual relations or unfairly competes.
- Example: An example of a contract that directly prohibits competitive business activity is a “covenants not to compete”. This type of contract restricts an individual from carrying on a trade or practice. These contracts are held to be void when they are unduly burdensome in their restrictions regarding the time and geographic locations for doing business. A covenant not to compete that has a limited time frame (3-6 months) and a limited jurisdiction (up to 50 miles) is generally enforceable if there is good reason for the restriction.
States are free to pass statutes or develop common law that protects the public interest. A contract that runs afoul of what is deemed necessary for the public good may also be void.
Discussion: How do you feel about the requirement that a contract have a lawful purpose? Can you think of any situations where this requirement may cause an unfair result for parties? Should there be a sliding scale for determining enforceability of contracts that violate public policy or are illegal? Why or why not?
Practice Question: Carter lives in New Orleans, Louisiana. The state is in a state of emergency based upon an approaching hurricane. Carter, along with thousands of other people, attempts to flee the city. The traffic is horrible and folks are running out of gas on the roadway. Carter is low on gas and pulls into a gas station. The gas station is charging $250 per gallon of gas. Carter is outraged, but purchases the gas and continues to flee the city. What are his legal options?
- Some contracts are formulated in such a way as to leave one party without other options and at a loss. Unconscionable contracts are extremely one-sided to benefit only one party while being unfair to the other. These contracts leave no choice to the disadvantaged party since the bargaining power is entirely up to the other party. The courts consider unconscionable contracts unlawful and void. However, the court generally does not award damages to either of the party but gives an order that releases the parties from their obligations. In this situation, Carter could sue to seek relief or restitution for the amount paid for the gasoline. He may owe the gas station a reasonable amount, such as $3 per gallon.