Chapter 12

Legality
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Metropolitan Creditors Service v.

Sadri (1993)
Summary of facts
Whats the issue?
What did the court decide?
Why?
Discussion

Gambling vs. Insurance

Insurable interest: A condition in which the
person who is to receive the insurance
policy benefit will suffer a financial loss
(before receiving the offsetting insurance
award) if the event insured against occurs.

Examples of insurable interest: your spouse, your

child, someone who owes you money, your
business partner, your home, your business
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Chem v. New York Life Ins Co.

YOU BE THE JUDGE

Summary of facts
How did the lower court
rule?
Whats the issue?
Vote

Licensing Statutes
When a licensing requirement is designed:
to protect the public, any contract
made by an unlicensed
worker is unenforceable.
merely to raise revenue, a contract
made by an unlicensed person is generally
enforceable.

AUTHENTIC HOME IMPROVEMENTS V. MAYO

Summary of facts
Whats the issue?
What was the courts ruling?

Usury
Usury laws prohibit charging excess
interest on loans.
The rules are very complicated

Illegal as Against Public Policy

Noncompetition agreements that are not
ancillary to a legitimate bargain.
Some exculpatory clauses.
Unconscionable contracts.

Noncompetition Agreements
Sale of a Business
When a noncompetition agreement is
ancillary to the sale of a business, it is
enforceable if reasonable in:
1. Time
2. Geographic area, and
3. Scope of activity.
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Noncompetition Agreements
Employment Contracts
A noncompete clause in an employment
contract is generally enforceable only
if it is:
1. Essential to the employer
2. Fair to the employee, and
3. Harmless to the general public
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King v. Head Start Family Hair Salons

Summary of Facts
How did the trial court
rule?
Whats the issue?
How did the Alabama Supreme Court
rule and why?

Non-competition employment
contracts
MORE likely to be enforced when it
involves:
Trade secrets learned on the job
Confidential information
learned on the job
Customer lists not readily available from
public sources
Limited time & limited geographic scope

Non-competition employment
contracts
LESS likely to be enforced when it
involves:

Employee already had skills before employed

Excessive time or geographical scope
Unduly harsh on employee
Significant impact on availability of critical
skills in the community

Exculpatory Clauses
Clauses that attempt to release (in advance) a
party from liability for ordinary negligence in
the event
of an injury to another
party or their property.

Generally unenforceable if it
attempts to exclude an
intentional tort or gross negligence.
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Exculpatory Clauses
Generally unenforceable:
If the underlying contract is for a service
that is essential to most or all
members of modern society,
or
When the parties have greatly unequal
bargaining power, or
When the clause is not clearly written and
readily visible in the contract.
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Ransburg v. Richards
Summary of facts
Whats the issue?

How did the court rule and

why?
Discussion

Adhesion Contracts
A contract offered on a standard form on a take it
or leave it basis
Often contain exculpatory
clauses
Strong evidence of unequal
bargaining power
Court will scrutinize contract

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Unconscionable Contracts
A contract that a court refuses to enforce
because of fundamental unfairness

Two factors that most often led to finding

of unconscionability:
Oppression
Surprise
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Worldwide Insurance Co. v. Klopp

(1992)
Summary of facts
How did the trial court rule?
Whats the issue?
How did the
court rule
and why?
Discussion
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Unconscionability Under the UCC

If the court finds the contract or any clause of
the contract is unconscionable
the court may:
(1) refuse to enforce the contract, or
(2) enforce the remainder of the contract
without the unconscionable clause, or
(3) limit the application of any
unconscionable clause
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