9.2 Agreements in Violation of Statute

Any bargain that violates the criminal law—including statutes that govern extortion, robbery, embezzlement, forgery, some gambling, licensing, and consumer credit transactions—is illegal. Thus, determining whether contracts are unlawful may seem to be an easy enough task. Clearly, whenever the statute itself explicitly forbids the making of the contract or the performance agreed upon, the bargain (such as a contract to sell drugs) is unlawful. But when the statute does not expressly prohibit the making of the contract to engage in an unlawful act, courts examine a number of factors.

It is important to remember that statutes can vary from jurisdiction to jurisdiction, and, thus, what might be unlawful conduct in one state might be lawful in another – making a contract valid in one state yet void in another.

Gambling Contracts

A gambling contract is an agreement between two or more parties to wager or bet on the outcome of a future event or contest over which the bettors have no control and which typically involves chance. These contracts are generally considered illegal due to a variety of legal and public policy concerns. Some of the concerns about these contracts include gambling addiction, financial hardship, the potential for fraud, and other social problems like potentially attracting criminal elements who are lured by the prospect of making easy money. That said, many states do have some kinds of gambling that have been legalized and regulated, including state-sponsored lotteries.

Because the outcome is contingent on events that lie outside the power of the parties to control does not transform a bargain into a gambling contract. For example, if a parent says to his daughter, “I’ll bet you can’t get an A in organic chemistry. If you do, I’ll give you $50,” this is not a gambling contract, but a unilateral contract, the consideration to the father being the daughter’s achieving a good grade.

Despite the general rule against enforcing wagers, there are exceptions, most statutory but some rooted in the common law. The common law permits the sale or purchase of securities: Sally invests $6,000 in stock in Acme Company, hoping the stock will increase in value, though she has no control over the firm’s management. It is not called gambling; it is considered respectable risk-taking in the capitalist system, or “entrepreneurialism.” Insurance contracts are also speculative, but unless one party has no insurable interest (a concern for the person or thing insured) in the insured, the contract is not considered a wager.

Sunday Contracts

At common law, contracts entered into on Sundays, as well as other commercial activities, are valid and enforceable. However, there are some state statutes or local ordinances that regulate or restrict certain activities, including entering into contracts, on Sundays or other specific days of the week, often due to religious or historical reasons. These laws vary significantly from one jurisdiction to another, but they often address matters such as retail sales, alcohol consumption, and recreational activities.

These laws trace to the Second Commandment which frowns on work performed on “the Lord’s Day.” In 1781, a New Haven city ordinance banning Sunday work was printed on blue paper, and since that time such laws have been known as ‘blue laws.’ The first statewide blue law was enacted in the United States in 1788; it prohibited travel, work, sports and amusements, and the carrying on of any business or occupation on Sundays. The only exceptions in most states throughout most of the nineteenth century were mutual promises to marry and contracts of necessity or charity. As the Puritan fervor wore off and citizens were, more and more, importuned to consider themselves “consumers” in a capitalistic economic system, the laws have faded in importance and have mostly repealed or unenforced. That said, New Jersey still has many Blue laws within the state and in specific municipalities. For instance, in the Borough of Paramus New Jersey, local ordinance code §391-2 provides:

Sunday activities restricted.

No worldly employment or business, except works of necessity and charity, shall be performed or practiced by any person within the Borough on the first day of the week, commonly called and hereinafter designated as “Sunday.”

Thus, many businesses located in the Borough of Paramus, including the Paramus Park Mall are closed on Sundays.

Usury

A usury statute is one that sets the maximum allowable interest that may be charged on a loan; usury is charging illegal interest rates. Formerly, such statutes were a matter of real importance because the penalty levied on the lender—ranging from forfeiture of the interest, or of both the principal and the interest, or of some part of the principal—was significant. But usury laws, like Sunday contract laws, have been relaxed to accommodate an ever-more-frenzied consumer society. There are a number of transactions to which the laws do not apply, varying by state: small consumer loans, pawn shop loans, payday loans, and corporate loans. In Marquette v. First Omaha Service Corp., the Supreme Court ruled that a national bank could charge the highest interest rate allowed in its home state to customers living anywhere in the United States, including states with restrictive interest caps. Thus it was that in 1980m Citibank moved its credit card headquarters from cosmopolitan New York City to the somewhat less cosmopolitan Sioux Falls, South Dakota. South Dakota had recently abolished its usury laws, and so, as far as credit-card interest rates, the sky was the limit. That appealed to Citibank and a number of other financial institutions, and to the state of South Dakota because it became a major player in the U.S. financial industry, creating many jobs in the state. 

Licensing Statutes

To practice most professions and carry on the trade of an increasing number of occupations, states require that providers of services possess licenses—hairdressers, doctors, plumbers, real estate brokers, anglers, egg inspectors, and, yes, lawyers are among those on a long list. As sometimes happens, though, a person may contract for the services of one who is unlicensed, either because (1) they are unqualified and conducting business without a license or (2) because for technical reasons (e.g., forgetting to mail in the license renewal application) they do not possess a license at the moment. To better understand the impact of a license or its lack, suppose that Robin calls Paul to provide legal services in drafting a contract. Paul, who does not have a license to practice law, drafts a contract for Robin’s purpose. Robin then discovers that Paul does not have a law license, and refuses to pay Paul for the contract. Is Paul entitled to collect the fee?

The answer to this question requires a three-step analysis. First, some occupations may be performed without a license (e.g., lawn mowing). Other occupations may be performed with or without certain credentials, the difference lying in what the professional may tell the public. For instance, an accountant need not be a certified public accountant to carry out most accounting functions. Still, some occupations require a license as a minimum requirement to perform a specific type of work. It is safe to assume that in the example above, Paul is required to hold a valid license to practice law to perform legal work for Robin.

The second step is to determine whether the licensing statute explicitly bars recovery by someone who has performed work while unlicensed. Reading the statute would be required to determine this, but many statutes do not contain a specific provision on the point. Statutes that do bar recovery would end our analysis, but let’s assume that the statute in this scenario is silent on the practice of law without a license.

When a statute is silent, the third step of the analysis is to distinguish between “regulatory” and “revenue” licenses. A regulatory license is intended to protect the public health, safety, and welfare. To obtain these licenses, the practitioner of the art must generally demonstrate his or her abilities by taking some sort of examination, like the bar exam for lawyers or the medical boards for doctors. A revenue license generally requires no such examination and is imposed for the sake of raising revenue and to ensure that practitioners register their address so they can be found if a disgruntled client wants to serve them legal papers for a lawsuit. Some revenue licenses, in addition to requiring registration, require practitioners to demonstrate that they have insurance. A license to tend bar, available to anyone 21 or older who applies and pays the required fee, would be an example of a revenue license. In our example, a lawyer’s license is a regulatory license.

If a state requires a professional license, it is necessary to determine whether the license is regulatory or revenue raising. Generally speaking, failure to hold a regulatory license bars recovery and such a contract would be void as illegal, but the absence of a revenue license does not bar recovery — the person may obtain the license and then move to recover.

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