it would be entitled to judgement. we think there are two basic reasons for this. first of all-- >> counsel, do you have any other witnesses or evidence you wish to produce at this time? ♪ [music playing]

>> you honor, i'd like to make a motion at this time. >> all right, why don't you-- >> --the whole truth and nothing but the truth, so help you god? >> i do. >> you may be seated. please state your full name, spelling your last name for the record. ♪ [music playing] >> the linchpin of any contract is an agreement between the two parties. without an agreement there can be no contract. a contract often has an impact on society as a whole and

because of this the law imposes certain restrictions on the kinds of agreements that can be created. the primary constraint is that the subject matter and purpose of an agreement, or bargain as it's sometimes called, must be legal. that sounds reasonable enough. a contract to steal documents would obviously be criminal in nature and, therefore, illegal. as would an agreement to bribe a public official or commit murder. an agreement to defame someone's reputation would constitute a tort and that too would be illegal. now keep in mind that there are two ways an agreement can be illegal. one is if it violates state or federal statutes. the second is if it's contrary to what the law calls public policy. but more about these later. for the moment we'll concern ourselves with agreements that have been ruled illegal because of statutory violations.

here are some examples. [narrator] >> six days a week this grocery store is no different from thousands of other american maet it sells eveing fromamburger to paper towels and tries to keep up with the competition by keeping prices down and running an occasional special, but there is one thing that marks this store as different. it has to comply with what are known as sunday statutes. technically speaking, sunday statutes prohibit the formation or performance of certain contracts on sunday. this means that onceunday rolls around the sale of most merchandise in this city is illegal. the law only permits necessities like food and medicine to be sold. sometime ago on what seemed to be an otherwise typical sunday afternoon, an officer of the court walked into this grocery store and closed it down. there had been no obvious crime committed. no sanitation, nor credit problems that might have pted such action.

but a sunday statute hadeen violated and the authorities were well within their rights in prohibiting the store from operating. on the sunday in question, the assistant store manager decided his chances for advancement would greatly improve if sales were higher than normal that day. unfortunately, the way he attempted to boost store revenues was by running a sunday special on trash compactors, hardly a household necessity. when local authorities got wind of the scheme the store was immediately closed down, costing it thousands of dollars and ensuring that the enterprising young assistant manager would, from that sunday on, be the enterprising young former assistant manager. so much for upward mobility. unfortunately, statutory violations are not limited to sunday afternoon infractions committed by overzealous employees. in this town, for example, a group of independently owned gas stations ran afoul of the law by agreeing

to fix prices. the law views this as a restraint on competition which is prohibited by state and federal anti-trust laws. price fixing is a prime example of how the ultimate impact of an agreement often goes beyond the parties originally involved in that agreement. in this case, it affects every motorist in the area by dictating the price of gasoline. the purpose of laws against price fixing i to prevent abuses like that from taking place. abuses that threaten unrestricted competition in the marketplace. then, of course, there's the issue of gambling. lessta hasrovided for gambng activities, such activities are forbidden by law. the rationale for this stems from the belief that wagering breeds crime and discord. now you might wonder at first about the connection between gambling and contracts. but in the eyes of the law there's a definite link.

according to legal theory, illegal wagering involves a person paying consideration for value in the hope of receiving a prize or other property by chance. the key point here is that the wagering always involves risk that's been artificially created. situations in which risk is a legitimate inherent feature like stock transactions for example, are not seen as gambling. certain individuals on wall street might not agree, but that's the law nonetheless. yet another way to violate the law is by what's known as usury. for usury to exist there must be a loan of money for which the debtor agrees to repay the principal at a rate of interesthat exceeds allowable legal limits. now while usury does occur from time to time, there are many business practices that appear to be usurious, but are not. examples of these include acceleration clauses, pre-payment clauses, and conditional sales contracts.

each of these at first glance might appear to involve excessive interest charges, yet each is perfectly legal. as for the high interest rates sometimes charged on revolving charge accounts, these may seem excessive to the people who are up to their eyeballs in credit card debt, but in legal terms, money owed on charge accounts is not considered borrowed money by many states. the finance charge is merely seen as part of a higher purchase price. therefore, usury laws don't apply. the rationale behind this is that the seller is at risk in giving up possession of personal property without receiving full payment at the time of the sale. in some instances, the court may elect not to nullify agreements that appear to violate valid statutes. this particular case involves a structural engineer named phillip logan who was hired by a las vegas contractor to consult on a multimillion dollar building project. >> most of the preliminary design work had been done

by the time i got involved. a lot of money had already been spent. i was out there for, oh, about a week or so i guess, but it didn't take long to figure out there were some major problems; real basic kinds of things; things that there was no way you could ignore. anyway, i put it all down on paper when i filed my report and flew back home to california to get back to business as usual. i don't usually work on projects out of state, but an old engineering buddy of mine from college days who lives up in nevada, he was tied up with another job, so he asked if i could fill in for him. that's how i got connected with the whole thing in the first place. anyway, i sent the builder a bill for my work and then put the whole thing out of my head. i was busy with other things. i really didn't give it much thought. i just figured i'd get paid when i got paid and that would be the end of that. [narrator] >> after 60 days, logan still hadn't been paid for his work. he made a couple of calls but didn't pursue the matter too aggressively.

finally, four and a half months after submitting his original invoice, logan learned that the project had run into serious financial difficulties. in large part because of the structural deficiencies he himself had uncovered. because of these financial problems, the principals involved were trying to cut whatever costs they could in order to salvage what was left of their project. unfortunately, one of the direct casualties of this belt tightening as philip logan. no one disputed the quality of his work, or the fact that he had submitted a proper invoice for payment. however, logan is certified and licensed in california, not in nevada. the builder contends that this statute violation nullifies the contract he had with logan, thus relieving him of any obligation to pay logan. the question is: can the builder use this defense? the answer hinges on the purposes of licensing statutes. >> there are two types of licensing statutes.

there are competency statutes in which the state is trying to be certain that the public is protected and the people performing a certain function have reached a level of competency. examples of competency licensing range all the way from barbers to attorneys and doctors. in all of those--all three of those professions, every state has some form of competency exam. either in the case of a barber, it's a hands-on examination, as well as a written examination to the lawyer where it may be a three-day written examination, but the state is trying to assure the public that there is some level of competency for the people practicing in those particular occupations and professions. >> by contrast a revenue generating statute, although there may be skills involved, is primarily designed to regulate who is involved and to generate funds when people buy the license. a good example is a peddler's license.

i mean obviously being a salesman is hard work. people that are good at sales are very good at sales, but nonetheless when they get their peddler's license the city, the state, the county, whatever, does not give them a test to see if they are qualified to be a salesman. they give them a form, the salesman fills it out, the salesman pays the fee and he's got his license. you are not concerned with protecting the public, you are concerned with knowing who is in business and getting the funds from them. >> now there are some statutes that are a combination of the two. initially they are competency and after that they are simply revenue raising. in many states lawyers are initially licensed on a basis of competency and they pass an exam, but after that they may just simply be paying in annual dues and they may not have any further requirements. >> if the contract is for regulatory purposes and the party who is to be licensed does not have a valid license for that jurisdiction,

the contract violates public policy. the contract is void. the unlicensed party cannot sue to collect his money if he doesn't get paid. if the recipient of the services does not pay for those services, breaches the contract, the unlicensed individual cannot file suit to collect. the unlicensed person can be sued for any torts that are committed or for any harm that is suffered by the recipient of the benefit. >> if a person who is not properly licensed under revenue raising statute enters into a contract, the courts are much more lenient with them which means they allow them to recover the reasonable value of their services and generally a pre-condition for them recovering is that they go back and pay their licensing fees, however far back it may have gone, but the courts are far less strict with that because the purpose is not to protect the public, but to raise revenue.

[narrator] >> so the crucial issue in licensing disputes is the intent of the licensing statute. in the case of phillip logan and the nevada builder, the court decided in logan's favor, even though logan was not licensed in nevada. the decision was based on the fact that licensing for engineers in nevada is revenue producing, rather than regulatory. the fact that phillip logan didn't have a nevada license didn't pose a threat to the health or welfare of anyone. therefore, the builder was obligated to pay logan the amount agreed to in their contract. >> we've seen several examples of agreements that were illegal because they violated statutes. a bargain may also be illegal even if it doesn't violate a statute if the court determines that it's contrary to public policy. public policy in this context refers to anything that is contrary to the public interests. any bargain judged to be detrimental to the public at large is considered to be a threat

to public policy and as such may be ruled illegal. public policy questions frequently arise in contracts containing what are called covenants not to compete. such clauses guarantee that someone leaving a business won't work in a competing business for a period of time, or within a particular geographic area. if the court decides, however, that the terms of the covenant not to compete are excessively restrictive, it may rule the agreement invalid on public policy grounds. here's an example. [narrator] >> up until about 18 months ago, jack holloway would never have considered working in an office. he'd been a partner in a successful manufacturing firm for well over 20 years and had always relished his role as production chief, a job that had kept hi as fa way frm chairs, desks, and paper as possible. the idea of changing careers held no interest for him

but the notion of early retirement did and when a group of investors made a very generous offer to buy him out, holloway decided to accept. at the time the non-compete clause written into the purchase agreement seemed like nothing more than a technicality. holloway had no intention of ever working again, so there seemed no reason to pay much attention to the fine print that discussed his future employment options. [thinking] >> retirement started out great, but it didn't last long, i'll tell you that. the first thing to go is the investments i set up with the money from selling the business. after 20 years running a company i figured i knew how to handle money. well, i figured wrong. and then before you know it, every other kind of bad luck you can imagine hit me and all of a sudden i need money. i wasn't crazy about going back to the grind again, but at least i still had most of my old contacts to fall back on.

at least i thought it did, until my son-in-law, the lawyer, dragged out the contract i signed when i sold the business. [narrator] >> jack holloway undoubtedly would have been better off had his son-in-law reviewed the contract before holloway signed it, rather than 12 months later. while the cash settlement was generous enough, the non-compete clause was brutally strict. first, it stipulated that holloway couldn't open a similar business in that state for the next 30 years, but equally damaging, it prohibited him from going to work for anyone else in his business also for a period of 30 years, which brings us back to the question of why jack holloway wound up working in an office in a field of no interest to him. and the answer is that basically he had no choice. that is, unless he could convince the court that the non-compete clause he agreed to when he sold his business was unreasonable and, therefore, contrary to public policy. in order to evaluate whether this particular non-compete

clause was unreasonable or not, we need to examine why the court permits non-compete clauses under any circumstances. >> courts recognize, in most instances, the need for non-competition or covenants not to compete clauses in contracts. for example, if you are selling a business to someone you are paying not only for the store and the inventory and the equipment, but you're paying for the good will that that party has built up over the years hoping that customers will continue to come in. >> for example, i'm going to sell you my restaurant. i have a restaurant in los angeles and i'm going to sell you the restaurant with the name and the goodwill. one of the things that you do not want is for me to open another restaurant where all of my old customers will come to the new place and you've bought an empty building, so you want a covenant not to compete. how long should a person have to get a restaurant up and going, to build his own clientele

and his own following? >> employers often become overzealous in their attempts to prevent the employees from entering into any competition after leaving employment, so they will say that there can be no competing business anywhere in the united states for a period of 50 years, for instance. the courts are very careful with these contracts because they do not want to in any way inhibit competition to any great extent, so the way they treat these is to say, they will only be held valid if they are reasonable as to time and distance. obviously, in the example that i just gave where the person was-- imposing the fact that there could be no putting no competition anywhere in the united states where the business was just strictly local and for a 50-year period,

this would then be unreasonable as to time and space so what the court could do is either cut that back and say we'll make it five years for a period-- for an area which is immediately surrounding the business, or they could say that the entire contract was void. >> they do put certain constraints, certain limits, on enforcing the clauses. they have to be reasonable in their length of time and they have to be reasonable in geographic scope. one to five years is a very typical time period for non-competition clauses and that's not to say that every contract can have a five-year non-competition clause. it depends on the nature of the business. if it's a high tech business, six months may be the maximum that a court would enforce a non-competition clause. on the other hand, if it's a t-shirt shop in a resort area it may take five years for the area

to build up enough that it could support another one. so it depends on the economic base, it depends on the nature of the business as to the length of time. >> how about geographic scope? if you're talking about los angeles, how far will a prson g to g to a restaurant? say five miles. okay, then i can't open a restaurant within five miles, but in another city, a city that is more attuned to walking, rather than driving, the reasonable distance might be 10 blocks, so there's no set geographic scope. you have to take into account the nature of the city, the nature of the business. if you've got a chain, a franchise system and you are selling it, you might be able to put in a clause that the person can't compete nationwide for a year, but if you've got a restaurant in los angeles, it's not fair to say "you cannot open a restaurant in new york because you sold me your l.a. restaurant." very few people will hop a plane and fly coast-to-coast just to go to dinner.

so you have to look at the entire nature of the business and where that business normally draws its customers. >> there are some cases where the courts have found that the non-competition clauses were clearly excessive. there was one fast-food restaurant that put clauses in all of its employee's agreement that said that in the event the employee left there, they could never work for another fast-food chain anywhere in the world for the rest of their lives which was clearly excessive given the nature of the fast-food business and also given the nature of the level of employment of these individuals. some of them were teenagers who were mopping tables, so it was an excessive type of an agreement. [narrator] >> the purpose of a non-compete clause is to protect the new owner of a business from competition from the previous owner. such agreements will normally be upheld if the time and area stipulations are reasonable. in jack holloway's case, the court rejected the clause requiring that holloway refrain from working in his former line

of work for 30 years. it also struck down as unreasonable the stipulation that he couldn't work in his chosen field anywhere in the state. it provided instead a limitation of 250 miles from his former business location. this was determined by the court to be a reasonable geographic limitation. as a result, he's been able to quit the white-collar job he never felt comfortable with and get back to doing what he does best. in addition to non-compete clauses there are other agreements that also violate public policy. one reason for this is the illegality of certain exculpatory clauses. these are clauses in a contract used to limit liability in advance of a potenty damaging situation. for example, when a company requires its employees to sign waivers absolving the firm of any responsibility in the event of an accident on the job. other contracts containing bargains that are contrary

to public policy include those in which someone promises to discriminate according to color, race, religion, natural origin, or sex as in certain real estate transactions. to summarize then, a bargain is illegal if its performance violates either statutes or public policy. statutory violations can be crimes considered evil in themselves like arson, murder, or the commission of a tort, or they can be violations concerning other matters like sunday statutes, price fixing, wagering, usury, or services performed without a license. and then, of course, there's a whole other class of bargains that are illegal because they violate public policy due to factors like non-compete clauses that are unconscionable, exculpatory clauses that are overreaching, and contracts that either promote discrimination or interfere with the duties of public officials.

of course, the critical question, given this veritable laundry list of illegalities, is what actually happens when an agreement contains illegal provisions. is it simply tossed out as if it never existed? in general, the answer is yes, but it's really not that simple. >> when illegality permeates all the provisions of the contract, it will not be enforced. for example, assume a contract between a chemical company and a truck company to haul its waste to an illegal dumpsite in the mountains. the chemical company and the trucking company are in pari delicto. they each know that the dumpsite is an illegal one. the entire purpose of that contract is illegal and a court will not enforce it. however, there are situations in which a contract can have illegal aspects and still be enforceable. >> one example using your fact situation is where

the parties are not in pari delicto. they are not equal wrongdoers. for example, the chemical company might contract with the trucking company to dispose of its wastes at an authorized, or legal, dumpsite. the trucking company might then dump the waste in the mountains illegally in order to avoid paying the fees at the authorized site. the chemical company would not know about that. the chemical company could still enforce the contract so that if they had to hire another trucking company to dispose of the wastes legally and pay that company extra, they would be able to collect that extra amount from the original trucker under the original contract. >> a second example is where the illegal activity is incidental or remote to the contract which is sought to be enforced. for example, assume that an employee of the chemical company seeks to collect his paycheck. his job is to load the waste onto the trucks. he is not aware that these wastes are going to be shipped to an illegal dumpsite.

that activity of illegality is incidental to his employment contract and therefore he could enforce his contract. >> a third example is where the illegal provision is only one part of a larger contract. for example, the chemical company might contract with the trucking company to carry all of its finished chemical products as well as dispose of its toxic wastes. if the toxic waste disposal provision were illegal, the court could sever that provision and refuse to enforce it, while enforcing the remainder of the contract, which was perfectly legal. >> so we have then identified three situations in which a contract can have illegal purposes yet still be enforceable. one is where parties are not in pari delicto. they're not equal wrongdoers. a second in which the illegal provisions are incidental to the purpose of the contract, which is sought to be enforced. and the third where illegal provisions are severable

from the legal portion of a contract. >> with all the legal pitfalls that can potentially undermine an agreement, you may be wondering how a valid contract ever manages to see the light of day. most of the time a legal contract emerges as the result of diligent, careful preparation. and nothing is more basic to the preparation process than ensuring that the agreement, the heart of any contract, is legal. if the performance of an agreement violates statutes pertaining either to actual crimes or torts, the agreement is illegal. if the performance of an agreement is contrary to public policy, the agreement is also illegal. and as we've seen, an illegal agreement will generally void the entire contract. so to all those involved in the business of writing contracts, don't let the passion of negotiating favorable terms and conditions obscure

the fact that above all else the agreement must be legal. for without that, everything else is just an exercise in futility. ♪ [music playing] captioning performed by rapidtext, inc. newport beach, ca www.rapidtext.com

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