5.2 Contracts Contrary to Public Policy

Public policy shapes contract enforceability, reflecting society's values and protecting public welfare. Courts may deem contracts violating public policy unenforceable, even if other elements are valid. This exception to freedom of contract prioritizes public interest over individual rights.

Contracts against public policy include restraint of trade agreements, those promoting divorce, involving illegal activities, or waiving fundamental rights. Courts use a balancing test to weigh competing interests, considering factors like violation severity and potential public harm.

Public Policy and Contract Enforceability

Public policy and contract enforceability

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• Fundamental principles, values, and interests that guide a society or state
  • Reflects collective moral, social, and economic standards of a community
  • Aims to protect public welfare and prevent harm to society
• Contracts contravening public policy may be deemed unenforceable by courts
  • Occurs even if all other elements of a valid contract are present (offer, acceptance, consideration)
  • Courts prioritize public interest over individual contractual rights in these cases
• Unenforceability due to violation of public policy serves as an exception to the general principle of freedom of contract

Contracts against public policy

• Restraint of trade agreements
  • Non-compete clauses unreasonably restricting an employee's ability to work in their chosen field after leaving a company
  • Agreements between businesses stifling competition (price-fixing, market allocation)
• Contracts promoting divorce
  • Agreements incentivizing or encouraging the dissolution of marriage
    • Contract offering a financial reward for getting divorced
• Contracts involving illegal activities
  • Agreements to engage in criminal acts (drug trafficking, prostitution)
• Contracts waiving fundamental rights
  • Agreements requiring a party to give up essential legal rights
    • Right to sue for damages
    • Right to a fair trial

Balancing test for policy violations

• Courts weigh competing interests involved in the contract
  • Public interest in enforcing the contract
  • Public policy considerations against enforcement
• Factors considered in the balancing test
  1. Severity of the violation of public policy
  2. Relative bargaining power of the parties
  3. Potential harm to the public if the contract is enforced
  4. Extent to which the contract has already been performed
• Balancing test is case-specific and depends on unique circumstances of each contract dispute

Consequences of policy-violating contracts

• Contract found to violate public policy may be deemed unenforceable in its entirety
  • Court will not aid either party in enforcing the agreement
  • Parties are left in the position they were in before entering the contract
• In some cases, courts may partially enforce a contract by severing offending provisions
  • Severability allows court to remove unenforceable clauses while enforcing remainder of contract
  • Only possible if offending provisions are not central to contract and can be separated without altering essential nature of agreement
• Restitution may be available to prevent unjust enrichment
  • If one party has conferred a benefit to the other under the unenforceable contract, they may be entitled to restitution to recover the value of the benefit conferred