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Principles Of Business Law - CHAPTER V























































Sec. 68. Nature of illegal agreements. Agreements possess-
ing those essentials normally required in the formation of a contract
may be unenforceable for one of two reasons: (1) either the object
sought to be accomplished by the agreement is illegal; or (2) the
parties have failed to reduce the agreement to writing, as required
by the Statute of Frauds. An illegal agreement is one which calls
for'the performance ot an illegal act by one of the parties. A con-
tract may be illegal ( 1 )_ because it is definitely forbidden by stat-
ute^or (2) becauseitis inimical to the best interestsofjociety. 1
Since the character!)! the laws differs from state to state, certain
contracts may be legal in one state and illegal in another. Those
agreements which are more or less uniformly held to be illegal are
considered in the following sections.

Sec. 69. Wagering contracts. The essence of a wagering
agreement is that one of the parties is to win at the expense of the
other, the winner being determined largely by chance. England,
from a very early date, has continued to regard such agreements as
legal. In this particular the United States has failed to follow the
precedent established by her mother country ; therefore, in the ma-
jority of the states, wagering contracts are considered illegal and

A contract to purchase grain futures or corporate securities on
margin, to the extent it is not forbidden by legislation, is legal if
the agreement is so drawn that delivery must be accepted if ten-
dered. However, if the agreement indicates an intention on the
part of the parties that one is to pay the other a certain sum, de-
pendent upon the rise or fall of the market price, it is illegal. Such
an agreement is merely a wager as to the future course of the mar-
ket, and as a gambling contract is unenforceable. 2 Where the con-
tract makes it possible for one of the parties to demand delivery
and is thus legal a subsequent agreement made at the time for
performance, whereby the parties agree to settle on the basis of the
change in price level, is legal. In effect, the new agreement merely
establishes the damages for failure to perform the original contract.

1 Tooker v. Inter-county Title Guaranty and Mortgage Co., 1946, 295 N.Y. 386,
68 N.E.(2) 179; p. 507.
'Pope v. Hanke, 1895, 155 111. 617; p. 508.


All transactions on the stock exchanges or boards of trade provide
for ultimate delivery and are, therefore, legal.

Sec. 70. Insurance contracts. An insurance contract, although
in essence a wager upon the continued existence of life or property,
is so beneficial to society as to form an exception to the general rule
concerning wagering agreements. So long as the person applying
for the insurance has an insurable interest in the person or property
insured, the contract is legal. If no such interest exists, the con-
tract becomes a mere wager upon the life or property of another
and is, therefore, illegal. Briefly, an insurable interest exists when
a destruction of the property or life insured might involve the ap-
plicant in a 4>ecuniary? loss. A more complete discussion of insur-
able interest is found in a later chapter which deals with the subject
of insurance.

Sec. 71. Usurious contracts. Most states limit the amount of
interest which may be charged upon borrowed money or for the
extension of the maturity of a debt. Any contract by which the
lender is to receive more than the maximum allowed by the statute
is illegal. In the majority of the states he is denied the right to
collect any interest in such cases, although a few of the states permit
the recovery of the legal rate. The law against usury is not vio-
lated by the collection of the legal maximum in advance, by mak-
ing a service charge which is no larger than is necessary to cover
the incidental costs of making the loaij^inspection, legal, and re-
cording fees in addition to the maximum interest rate, or by
charging a higher price for goods sold on credit than for cash sales.
It is the latter principle which makes it possible to add a finance or
carrying charge, in addition to the maximum interest, on long-term
credit transactions.

Vyhe purchase of a note or bill of exqhangQ at Q H^^i^t grflftt- ftr
than the maximum interest rate is not/jisurious. A note or bill of
exchange is considered the same as any other personal property and
may be sold for whatever it will bring upon the market. There are
some courts, however, which hold that, if the seller indorses the
negotiable paper and thus remains personally liable on it, a dis-
count greater than the legal rate of interest is usurious. This is
particularly true if the paper is considered worthless except for the
indorsement. In such a case the sale of the paper merely amounts
to a loan for the period the note has yet to run.

So long as one lends the money of others he may charge a com-
mission in addition to the maximum rate. A commission may not
be legally charged, however, where one is lending his own funds, 8
even though he has to borrow the money with which to make the
loan. The various states have also enacted laws governing the
operations of pawnshops and small-loan companies, which, under
certain well-defined limitations, may charge a much higher rate of
interest than is permitted on ordinary loans. An exception to the
general rule is also made in favor of corporations; bonds of incor-
porated companies may bear any rate the particular industry is
willing to pay.

Sec. 72. Sunday contracts. The validity of contracts entered
into on Sunday is dependent upon the law of the particular state
in which they are made. In some states all such contracts are
legal; in others, practically all of them are illegal. The western
states are very liberal in such matters, while the eastern states are
more conservative and refuse to enforce most Sunday contracts.

Sec. 73. Limitation of liability. Provisions in contracts where-
by institutions quasi public in nature attempt to relieve themselves
of the consequences of their own negligence are illegal. A quasi-
public business is one which holds itself out as being ready and will-
ing to serve any member of the public who makes application for
the particular service and one which has become an everyday neces-
sity in the lives of certain groups of people. Railroads, telegraph
and telephone companies, public warehouses, and other businesses
of like nature, therefore, are restricted as to the terms which they
may include in their contract. 4 For example, a clause in a bill of
lading issued by a railroad stating that all goods are shipped at the
owner's risk will not relieve the company of liability if the goods are
destroyed or damaged as a result of the negligence of a railway

Sec. 74. Contracts to influence governmental action. A con-
tract, except for strictly professional services, whereby one proposes
to use his influence to secure executive, legislative, or judicial ac-
tion, is illegal. For this reason an agreement whereby one is to use
his influence to bring about the election or appointment of another
to public office is unenforceable.

A contract whereby one agrees in any manner to obstruct the
wheels of justice falls under the same heading. To illustrate: A
agrees to pay B one thousand dollars if the latter will absent him-
self from the state during the time a certain case is being tried. B
upon his return cannot legally recover the money promised. His
only possibility of recovery rests upon a voluntary payment by A.

Contracts quite similar to those involving the relation of one to
his government are those which involve the relation of an employee
to his employer. Any attempt by contract to persuade an em-
ployee to violate his duty to his employer is illegal. Likewise, any

* Inland Compress Co. v. Simmons, 1916, 59 Okla, 287, 159 Pac. 262; p. 509.


agreement whereby one person is to injure the person or property of
another in any manner is illegal.

Sec. 75. Effect of illegal contracts. It is incorrect to say that
illegal contracts are void. They are merely unenforceable. The
courts, in such cases, simply refuse to grant any relief. Although
one of the parties has fully carried out his part of the agreement,
he may neither demand performance nor force a return of his con-
sideration. The court leaves the parties just as it finds them; 5
fully or partially executed contracts are left undisturbed.

Sec. 76. Exceptions. To this general rule there are at least
three exceptions. If the refusal to grant affirmative relief has the
indirect effect of enforcing an illegal contract, the court will give the
necessary aid to relieve the injured party from further performance
of the illegal agreement. Again, where the situation is such that
the best interests of a large portion of the public demand that the
contract be enforced, the court will see that the terms of the agree-
ment are carried out. Thus, a contract whereby a bank loans to a
customer more than the canadian law permits is illegal ; however, the inter-
ests of other depositors being involved, the borrower must repay
what he has borrowed. Where certain contracts are made illegal
to protect society, or a certain segment of it, the injured party is
usually granted relief if he is one of the group which the law was
designed to protect.

A party who performs an illegal contract in ignorance of the fact
that it is illegal, because certain important facts are not revealed
to him, may recover for his performance. Thus, a drayman who
carries intoxicating liquors contrary to law, thinking that he is
transporting groceries, may recover for his services as a carrier.

Sec. 77. Contracts illegal in part. Contracts which contem-
plate the performance of various acts, some legal and some illegal,
may be enforced to the extent that they are legal. This is true
only in those cases in which the contract, by nature, may be so
divided that the legal portion may be segregated from the illegal

Statute of Frauds

Sec. 78. Written contracts. As a general rule, contracts are
enforceable, although not reduced to writing. An oral agreement,
if proved, is as effective as a written one. A written agreement
signed by the parties, however, possesses at least two distinct ad-
vantages over an oral one. In the absence of a writing it often be-
comes difficult to prove the existence of a contract. Thus, if one of
the parties denies the existence of an agreement, and no outside

6 Brilson v. Moffatt et al., 1916, 173 Cal. 685, 161 Pac. 259; p. 510.


witness was present when the contract was formed, it becomes quite
difficult to prove to a jury that a contract exists. No contract is of
value in court unless it can be proved.

Contracts that are reduced to writing as a rule leave few matters
open about which a dispute may arise. A written agreement can-
not be varied by parol evidence. Too often an oral agreement
leaves much to conjecture, with the inevitable result that disagree-
ments occur and the courts are called upon to settle the dispute.
Although a written agreement is not always essential, in many cases
it is desirable nevertheless.

Although it is best to modify a written agreement by a new writ-
ing, an agreement originally reduced to writing may be effectively
rescinded or modified by a subsequent oral agreement. This holds
true only where the agreement does not deal with subject matter
which is required to be in writing under the Statute of Frauds.

To illustrate, let us assume a written agreement has been made
for the erection of a certain building in accordance with specifica-
tions for $50,000. Parol evidence would not be admitted later to
show that the original specifications or price were other than those
shown in the writing. However, it would be possible to present
oral evidence that the specifications and price had been changed
after the original agreement had been entered into. On the other
hand, a contract for the sale of real estate which had been reduced
to writing could not be altered by a later oral agreement, because
such contracts are required by the Statute of Frauds to be in writ-

Sec. 79. Statute of Frauds. At an early date in English his-
tory there was enacted what is known as the Statute of Frauds.
This statute provided that certain contracts could not be enforced
unless they were reduced to writing and signed by the parties
sought to be bound thereby. It was designated the Statute of
Frauds because its purpose was to prevent fraud on the part of
those who attempted to establish a valuable contract by the false
testimony of their friends. The law varies somewhat from state
to state and those provisions which are fairly uniform in the various
states are discussed in detail in the sections which follow. In
addition to these, many states require the following to be in writ-

1. The appointment of an agent to sell real estate.

2. The creation of a trust.

3. The promise to pay a debt which has been outlawed by the
Statute of Limitations or which has been barred by bankruptcy.

4. An agreement to bequeath property to someone under the
term$$)f a will.


Sec. 80. Debt of another. Contracts whereby one becomes
responsible for the debt, default, or miscarriage of a third person
must be reduced to writing. Such agreements are called contracts
ofjuaranty^ and are not enforceable if madeorally. To illustrate^
Aurally agrees to become responsible f or 5 's grocery bill at C's
store during the next six months. B purchases $300 worth of gro-
ceries and fails to pay for them. Although A, in a sense, is morally
bound to make good his promise, it cannot be enforced, as it was
not in writing.

A contract of guaranty exists only where the promise of the
guarantor is collateral or secondary to the promise of some other
party. If the agreement is such that the promise of the other party
is cancelled or merges in the present agreement, no guaranty results,
but the promise becomes an original one and no writing is required,
Thus, in the previous illustration, if the credit had been extended
directly to A the goods being charged to his account^^oijiadjbeen
extended to both Ajmd jointly, the oral agreement would have
beenbnicUngr^T^ such a case B merely becomes an agent of A,
witKTpower to purchase groceries. There is no other debt or prom-
ise in favor of C to which A's promise is collateral. Although A
may recover from B the amount expended, so far as the grocer is
concerned the debt is that of A.

An agreement which has for its object the substitution of one
debtor for another does not fall within the statute. No writing is
required in such a case. Thus, if A says to I 7 , "If you will release B
from his liability to you, I will pay the same," and Y consents, the
agreement is binding, although made orally, because it is a primary
promise of A and not secondary to B's promise, as in a guaranty

In case a guarantor agrees to beconagLIgsponsible for the Ttfi.fa.n'ii
or 'debt of another because of "some material advantage which he
may gain from the transaction, no^writing is required. 6 Thus, an
oral guaranty by a del^redere^agent is enforceable. Since the
agent obtains a commission for selling the merchandise, his pecuni-
ary interest in the consignment disposes of the necessity of a writ-
ing, and the consignor may collect from the consignee on the oral
guaranty if the purchaser fails to pay.

Sec. 81. Contracts of executors. Agreements entered into bj
those administering estates, whereby they agree to become liable
out of their own property for the debts of the estate, must be ir
writing. In such a case the executor or administrator is in realitj
agreeing to become responsible for the debts of another, namely, th

6 Bailey v. Marshall, 1896, 174 Pa. St. 602, 34 AtL 326; p. 510.


Sec. 82. Contracts in consideration of marriage. Contracts,
the consideration for which is the marriage of one of the parties, fall
within the Statute of Frauds. Thus A promises $500 to B upon his
marriage to Y. Such a promise cannot be enforced if made orally.
Engagement contracts are not included in the act and are enforce-
able, although there is no written evidence of such an agreement.

Sec. 83. Sale of real estate. Contracts for the sale of real es-
tate have always been deemed very important by the law firms. From
the date when people first aspired to become owners of land, certain
formalities were required at the time of its transfer. In order to
prevent a forced transfer of land as a result of false testimony, it is
provided that all agreements for the sale of any interest in or con-
cerning real estate shall be in writing. The language is broad
enough to include an estate for life, a mortgage, or a lease, as well as
an estate in fee simple. The statute in most states excludes from
its operation leases of short duration ; thus, in practically all states,
a lease for one year requires no writing. Although timber, wild
grass, or fixtures permanently attached to real estate are considered
part of the realty, an oral contract for their sale will be enforced,
provided the agreement indicates that title is to pass after they are
severed from the land. To illustrate: A orally agrees to deliver to
B one hundred twelve-inch trees from certain timber land. Later
he refuses to deliver the trees and denies any liability. Inasmuch
as it is apparent that title was to pass only after the trees were
severed from the land, the agreement is enforceable without any
written evidence, unless the price is enough to bring the case under
the personal property rule.

Sec. 84. Part performance. In general, it may be said that
part performance by the buyer of his contract to purchase real
estate does not make the contract enforceable. The writing is not
dispensed with merely because he has made a down payment or
taken possession of the property. If the seller refuses to carry out
the oral agreement, the buyer has as his only remedy the right to
recover all payments made and the reasonable value of all im-
provements which have been added by him. If the buyer refuses
to perform, he may not recover the payments he has made or the
value of the improvements.

Occasionally, the buyer has progressed to the point where money
will not restore him to his former position, and in extreme cases
courts of equity will enforce the oral contract. 7 If his health has
been undermined in an attempt to carry out the oral agreement or
repairs have been so extensive that the nature of the property has

7 Veeder, Rec. v. Horstmaim et al v 1903, 85 N.Y. App. Div. 154; p. 511,


been materially altered, the courts in order to do equity may disre-
gard the Statute of Frauds.

Sec. 85. Contracts of long duration. A contract which by its
terms must continue for a period longer than one year from the
making thereof must be reduced to writing. Thus, an agreement
to work for another for a period of years, or a contract which gives
to a party exclusive territory for eighteen months, is not enforce-
able if made orally. Where the contract is possible of completion
within a year, no writing is essential, although actual performance
is spread over a period of years. For illustration, let us assume
that A agrees orally to build a house for B at a cost of $15,000. No
date is set for final completion of the contract. The work pro-
gresses over a two-year period, at the end of which time B denies
the existence of a contract and sets up the Statute of Frauds as a
bar to A's action. A may recover, nevertheless, as the contract is
such that A could have fully performed within a year had he seen
fit to do so. The real test is: Do the terms of the agreement per-
mit of its performance within tKe period of one year? Is perform-
ance within one year merely improbable rather than impossible?
If so, no writing is essential, regardless of when the performance is
completed. Thus, if the time for performance is of uncertain dura-
tion, being dependent upon the happening of a contingency such
as death, the arrival of a certain ship, or the sale of certain prop-
erty, no writing is required despite the fact that actual performance
extends over several years. Since it is possible for such contingen-
cies to occur within a year, the contract falls outside the statute.
Attention should also be called to the fact that the year is figured
from the date of the agreement, and not from the time performance
is to begin. Thus, an oral contract to work for one year at a cer-
tain salary, employment to begin two days later, would have to be
in writing.

In contracts which provide for performance over a period in ex-
cess of one year, full performance of all of his obligations by one
of the parties, which has been accepted by the other, makes the
agreement enforceable. Thus, if a present sale of goods is made,
followed by delivery, the oral agreement is binding, although the
buyer is to make tis payments over a period of eighteen months.
Some few states go even farther and hold that, where the contract
calls for complete performance by one of the parties within a year,
the agreement is effective.

Sec. 86. Sale of personal property. The old English Statute
of Frauds provided chat any contract for the sale of personal prop-
erty involving mor ^ than ten pounds sterling should be in writing.
This provision has become part of the law of every state and varies
only as to the amount. In one state any sale involving over thirty
dollars must be written, while in another any sale of personal prop-
erty for less thanjiye hundred dollars may be oral and still be en-
forced. In determining whether the value of property which is the
subject of sale is enough to fall within the statute, it often becomes
necessary to decide how many contracts have been entered into.
Thus, A orders from B fifteen bushels of potatoes to be delivered at
once, and ten barrels of apples to be delivered ten weeks later.
Either item considered alone is worth less than $50; both items
total over $50. If the parties intended only one contract, the
Statute of Frauds is applicable; however, if two contracts were
entered into, no writing is required. The intention of the parties
in these cases is gleaned from such factors as the time and place of
the agreement, the nature of the articles involved, and other sur-
rounding circumstances. 8

In some states perhaps in most of them the statute is so
worded or construed as to include both tangible and intangible
property. A contract for the sale of notes, bonds, or stock, involv-
ing a sum in excess of the stipulated amount, would, in such states,
be enforced only when evidenced by a writing.

Sec. 87. Delivery of part of the goods. Where the statute re-
quires contracts for the sale of personal property to be in writing,
acceptance and receipt of a portion of the goods make a writing un-
necessary. The acceptance, which consists of the buyer's consent
to become the owner of certain designated articles, may take place
either before or after he receives the goods. Delivery is said to take
place when the buyer assumes control of the property which he has
purchased. Botji acceptance and receipt of the p;oods 1 orapart of
them, jire required to take the case out of the statute.

Partial^ payment by the purchaser for the personal property or
a tfaiisferof jomething in earnest to bind the bargain will alsohave
ffielTffect of taking the case out of the statute. The payment may
consist of money or anything else which the parties deem to have

Sec. 88. Manufacture of special articles. A_contract for the
saleof personal property which is to be specially manufactured for
jthe purchaser does noi^rmuirg^ a writing, eyen^ though^
price exceeds the limit prescribedTby the statute. hbweverflf the
article to be manufactured is something which is regularly manu-
factured and readily salable, a writing is required, although the
article must be produced before delivery takes place. The former

8 Weeks v. Crie et al, 1900, 94 Me. 458, 48 Atl. 107; p. 512.


case is much like an agreement for labor and materials; 9 whereas
the latter is a mere contract to sell property which must yet be

Attention should be called to the fact that a writing is just as
essential in a contract of sale as in an agreement to sell. Although,
according to the law of sales, title to ascertained property passes at
the time of the agreement and thus becomes a contract of sale
if the amount involved exceeds that provided in the statute, no
action can be maintained, unless the article has been delivered to
the purchaser and accepted by him, or the other requirements of
the statute have been met.

Sec. 89. Nature of the writing. The writing required by the
Statute of Frauds is not a formal written document signed by both
parties. The law merely requires that some note or memorandum
concerning the transaction be signed by the party sought to be
bound by the agreement. Thus, a situation exists in which one
party may be bound by an agreement, although the other party is
not bound. Such a result may be explained on the theory that the
agreement is legal in all respects, but proper evidence of such an
agreement is lacking, unless the person sought to be charged with
the contract has signed a writing. Any kind of note or memoran-
dum that describes the property involved, sets forth the major
terms, and indicates the parties to the agreement is sufficient. If
one memorandum is incomplete, but it is clear that two or more
writings relate to the same subject matter, they may be joined to
supply the necessary written evidence. This is true only if it is
clear that the writings relate to the same agreement.

The signature may be quite informal and need not necessarily be
found at the close of the document. 10 It may be in the body of the
writing or elsewhere so long as it identifies the writing with the sig-
nature of the person sought to be held.

Sec. 90. Effect of no writing. It is said that a contract which
requires a writing dates from the time of the oral agreement, but
is unenforceable until written evidence of it is available. The
agreement is valid in every respect, except that proper evidence is
lacking. However, if, at any time before suit is started, the party
sought to be held signs any statement which indicates the existence
of such a contract, he furnishes the necessary evidence. Such a
writing may be obtained by the connection of certain letters ex-
changed in correspondence concerning the subject matter involved.
Other evidence, regardless of how authentic and preponderant it is,

Goddard v. Binney, 1874, 115 Mass. 450; p. 513.

10 Cohen v. Arthur Walker and Co., Inc., 1922, 192 N.Y. S. 228; p. 514.


cannot be substituted. The Statute of Frauds is complied with
only by the securing of some note or memorandum in writing signed
by the proper party.

Review Questions and Problems

1. G and H are both seeking a state appointment. They reach an
agreement whereby G contracts to withdraw from the race and to aid H .
Because of G's action H agrees to pay to him one half of the fees col-
lected. Is the agreement enforceable?

2. What is meant by a usurious contract? May the effect of such a
contract be avoided by the charging of a commission?

3. Are all insurance contracts enforceable? What is meant by an in-
surable interest?

4. A ships goods over the X Railway Company. The bill of lading
stipulates that all goods are shipped at the owner's risk. The goods are
destroyed en route as a result of the negligence of a railway employee.
May A recover?

5. A is employed to work in B's drag store. He is to receive a salary
of $50 a week. One half of his time is spent in waiting on trade at the
counter, and the balance is spent in illegally dispensing liquor. May he
recover any of his salary from J5?

6. What are the advantages of a written contract? What is the pur-
pose of the Statute of Frauds?

7. A held a claim against B and C for $500. He was threatening to
sue them when F, the father of B, promised A to pay the amount if A
would refrain from bringing suit for eight months. No suit was brought
during that period, and A now desires to recover from F. Assuming that
the agreement was not in writing, is it enforceable?

8. gave M a written mortgage on certain real estate as security for
a loan of $3,000. A later oral agreement provided that the mortgage
should secure an additional $500. Was the oral agreement binding?

9. A made an oral contract with B whereby A was to convey certain
real estate to B for the price of $6,000. In reliance upon the oral agree-
ment, B hauled certain fertilizer to the farm, piped water to the feed lots,
and made cement platforms for feeding livestock. Under these condi-
tions was the oral agreement enforceable?

10. A orally agrees to build a garage for B at a cost of $400. The ga-
rage is not completed until two years from the date of the agreement. Is
a writing required in such a case? When does the one-year period begin
to run in such cases?

11. When must a sale of personal property be in writing? What is
the effect of partial delivery? Will part payment eliminate the neces-
sity for a writing?

12. What is the nature of the writing required to comply with the
Statute of Frauds? How m&ny must sign the agreement? When must
the writing take place?

13. An injured employee entered into an oral contract with his em-
ployer to surrender any claim he might have, in consideration of the
employer's promise to employ him at a certain job so long as the em-
ployee lived or his work was satisfactory. Was the oral agreement en-

14. A mortgagee charged the mortgagor $3,750, in addition to the max-
imum interest, as an expense of refinancing a mortgage of $75,000. Will
the mortgagee be able to collect the interest?

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