Illegality and public policy - Next Generation Bar Exam

1. What is the general effect of a contract whose formation or performance is illegal?

   It is unenforceable. Courts will not lend their aid to either party to an illegal bargain.

2. What do many courts do when a covenant not to compete is overbroad?

   Enforce it to the extent reasonable, unless the drafter acted in bad faith. Jurisdictions differ: some blue-pencil divisible terms, some reform the covenant, and a minority refuse enforcement entirely.

3. What is the status of a promise in restraint of trade that is not ancillary to a valid transaction?

   It is unenforceable as a naked restraint. A restraint must protect a legitimate interest arising from an otherwise valid relationship.

4. What is the effect of a change in law after formation that makes performance illegal?

   The affected duties are discharged as impracticable. Supervening illegality is treated as an excuse rather than as making the contract void from the start.

5. A contractor pays a bribe to a building inspector and later sues to recover the payment. What is the result?

   Recovery is barred, because the parties are equally at fault. Under the in pari delicto rule, courts leave equally culpable parties where they find them.

6. An unlicensed electrician sues for unpaid fees, and the licensing statute exists to protect public safety. What is the result?

   The electrician cannot enforce the contract. A regulatory licensing requirement bars enforcement by the unlicensed party.

7. When does a party's failure to hold a required license bar enforcement of its contract?

   When the licensing statute is regulatory, protecting the public, rather than merely raising revenue. An unlicensed party under a revenue statute may still enforce the contract.

8. What test governs a covenant not to compete given by the seller of a business?

   It must be reasonable in time and area to protect the goodwill the buyer purchased. Covenants ancillary to the sale of a business receive more deference than employee covenants.

9. What liability can an exculpatory clause not waive as a matter of public policy?

   Liability for intentional or reckless misconduct. Clauses releasing negligence liability may be enforced, subject to public-interest limits.

10. When may a party to an illegal bargain nevertheless obtain restitution?

    When it is less at fault, belongs to the class the law protects, or withdraws before the illegal purpose is achieved. These exceptions to the in pari delicto rule prevent a more culpable party from keeping the benefit.

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