Defenses to enforceability - Illegality, unconscionability, and public policy

Learning Outcomes

After reading this article, you will be able to identify and apply the main defenses to contract enforceability tested on the MBE: illegality, unconscionability, and public policy. You will understand how these doctrines operate, when they render a contract void or unenforceable, and how courts approach related exam scenarios.

MBE Syllabus

For MBE, you are required to understand when a contract may be unenforceable due to illegality, unconscionability, or public policy. This article covers:

• The effect of illegality on contract formation and enforcement.
• The doctrine of unconscionability and its application.
• Contracts void or unenforceable on public policy grounds.
• The consequences of these defenses (void, voidable, or unenforceable).
• Exceptions and limitations to these defenses.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is most likely to render a contract unenforceable?
   1. The contract is for the sale of goods worth $400.
   2. The contract is for a legal service, but the provider is unlicensed in a state requiring a license for protection of the public.
   3. The contract is for the sale of a car between two friends.
   4. The contract is for a service performed by a minor.
2. A court will most likely refuse to enforce a contract term if:
   1. The term is unfavorable to one party but was freely negotiated.
   2. The term is so one-sided that it shocks the conscience and was imposed in a standard form contract.
   3. The term limits damages to direct losses only.
   4. The term requires written notice of breach.
3. Which contract is most likely void as against public policy?
   1. A contract to pay a witness for truthful testimony.
   2. A contract to pay a witness for not appearing in court.
   3. A contract to sell a business.
   4. A contract to lease office space.

Introduction

Contracts may be unenforceable even if all elements of formation are present. The main defenses to enforceability tested on the MBE are illegality, unconscionability, and public policy. These doctrines protect the courts from enforcing agreements that violate law, are grossly unfair, or undermine important societal interests.

Key Term: Illegality
A contract is illegal if its subject matter or consideration is prohibited by law or requires a party to commit a crime or tort.

Key Term: Unconscionability
Unconscionability is a defense where a contract or term is so unfair or oppressive that no reasonable person would agree to it, and no fair person would impose it.

Key Term: Public Policy
Contracts may be unenforceable if they contravene established interests of society, even if not strictly illegal.

Illegality

A contract is unenforceable if its formation or performance involves illegal conduct. This includes contracts for criminal acts, torts, or those that violate statutes. Illegality can arise from the contract's subject matter or its consideration.

• Effect: An illegal contract is generally void. Courts will not aid either party. If the contract is only partly illegal, the legal part may be enforced if it can be separated.
• Exceptions: If one party is less at fault (not in pari delicto), or is part of a protected class, restitution may be available.

Key Term: In Pari Delicto
Both parties are equally at fault for the illegality; if not, the less-culpable party may sometimes recover.

Unconscionability

Courts may refuse to enforce a contract or term that is unconscionable at the time of formation. Unconscionability has two aspects:

• Procedural unconscionability: Problems in the bargaining process, such as hidden terms or lack of meaningful choice (e.g., "take it or leave it" contracts).
• Substantive unconscionability: The actual terms are extremely one-sided or oppressive.

If unconscionability is found, the court may refuse to enforce the contract, strike the offending term, or limit its application.

Public Policy

Even if a contract is not illegal, it may be unenforceable if it violates public policy. Examples include:

• Contracts restraining marriage or trade unreasonably.
• Contracts to commit a tort.
• Contracts that interfere with the administration of justice (e.g., paying a witness not to testify).
• Contracts that waive essential legal rights in a way contrary to statute.

Courts balance the interest in freedom of contract against the harm to public interests.

Worked Example 1.1

A agrees to pay B $5,000 to burn down a competitor's warehouse. B takes the money but does not perform. Can A recover the money?

Answer: No. The contract is for an illegal act (arson). Courts will not enforce the contract or assist either party. A cannot recover the money.

Worked Example 1.2

A consumer signs a standard form contract with a lender. The contract contains a clause allowing the lender to repossess all of the consumer's property for any missed payment, even if the missed payment is $1. The consumer misses a $1 payment and the lender seeks to enforce the clause.

Answer: The court may find the repossession clause unconscionable. The term is grossly one-sided and would likely be refused enforcement.

Worked Example 1.3

A and B enter into a contract where A promises to pay B $10,000 if B agrees not to testify in a lawsuit against A. Is this contract enforceable?

Answer: No. The contract is void as against public policy because it interferes with the administration of justice.

Exam Warning

Courts distinguish between contracts that are illegal by statute and those merely contrary to public policy. Not all unfair or undesirable contracts are void—there must be a clear violation of law or policy.

Revision Tip

If a contract seems grossly unfair or involves prohibited conduct, consider whether illegality, unconscionability, or public policy make it unenforceable.

Key Point Checklist

This article has covered the following key knowledge points:

• Illegality renders a contract void if it requires criminal, tortious, or prohibited conduct.
• Unconscionability allows courts to refuse to enforce contracts or terms that are extremely unfair.
• Contracts may be unenforceable if they violate public policy, even if not strictly illegal.
• Illegal contracts are generally void; courts will not aid either party unless an exception applies.
• Unconscionability can be procedural, substantive, or both; courts may strike or limit unfair terms.
• Public policy defenses include contracts restraining marriage, trade, or interfering with justice.
• Exceptions exist for less-culpable parties or those protected by statute.

Key Terms and Concepts

• Illegality
• Unconscionability
• Public Policy
• In Pari Delicto