25. Contracts: Public Policy

>> In some circumstances,

a court will refuse to
enforce a contract on

the grounds that to do so
is against public policy.

To give an extreme example,

based on an actual case from Japan,

a woman hired a hitman to murder
her husband and his mistress.

The hitman botched the job
and failed to kill either,

and the woman sued him
for breach of contract.

Despite the existence of mutual
assent and consideration,

the court dismissed her case,

refusing to enforce the contract.

Given that murder is a crime,

it is not hard to see that a
contract for murder, that is,

a contract to commit a crime,

is a contract against public policy.

But the problem with refusing
to enforce a contract on

the grounds that it is
against public policy is that

the concept of public
policy is very malleable

and has a tendency to become tinged
with a judge's views on morality.

For instance, in jurisdictions where
prostitution and gambling are crimes,

courts have refused to enforce
contracts involving these activities,

such as promises to pay gambling debts.

Such cases are analogous
to the hitman contract.

Courts refuse to enforce contracts
involving criminal activity.

But some courts have
also refused to enforce

gambling debts in jurisdictions
where gambling is not a crime.

Those courts have reason that
although gambling may not be illegal,

it is nevertheless immoral behavior.

Section 178, subsection 1,

of the second restatement
states that a promise is

unenforceable on the grounds of
public policy in two instances.

First, where specific legislation

renders certain kinds of
promises unenforceable.

Second, where the interest in
enforcement of the promise,

such as the party's expectations,

is clearly outweighed by a public policy

against enforcement of those kinds
of promises such as gambling.

The section goes on to identify
some relevant factors.

But because the factors
are themselves vague and

because different courts assign
different weights to different factors,

it is difficult to predict the
outcome in any given case.

Your text gives two other examples of

contractual relationships that may be
challenged as against public policy;

covenants to not compete against a former
employer and surrogacy agreements.

An interesting line of cases examine

the issue whether it is
against public policy for

one party to release the other from

any liability arising out
of the other's negligence.

Such releases are fairly common.

Many entities that provide

recreational activities such as
horseback riding or scuba diving,

routinely require their
patrons to sign such releases.

In deciding whether to
uphold such releases,

courts have not adopted
many bright line rules.

However, one well accepted
rule is that a party cannot

contractually disclaim liability
for its own gross negligence.

But when ordinary negligence is involved,

courts have not established
the bright line rules.

Instead, they employ a
multi-factor balancing test.

Economics often plays a role
in this balancing test.

For example, back when cameras required

film and film was relatively inexpensive,

the manufacturers of
film regularly limited

their liability for defective film
to the cost of the film itself.

Purchasers of defective film
would sometimes challenge

such limitations on the ground that
they were against public policy.

The purchasers would argue that

their losses far exceeded
the cost of the film.

In one case, a wedding
photographer's film was defective,

and the plaintiff alleged that it costs

several thousand dollars to restage the
wedding to have the pictures taken.

Moreover, purchasers would argue
that the defective film was

the manufacturer's fault
and public policy should

hold negligent parties accountable
for the losses they cause.

The contractual disclaimer of
liability violated public policy.

Nevertheless, in the cases involving film,

courts pretty regularly upheld
contractual disclaimers of liability.

The courts reason that the manufacturer's
risk of being held accountable for

large losses would result in

a steep increase in the price of
film for the rest of all of us.

As the manufacturers
would pass on the cost of

insuring against such
losses to their customers,

and that on balance this would not
be beneficial to society as a whole.

But this balancing act
gets more problematic when

personal injury as opposed to
just economic loss is involved.

Let's say the cost of a recreational
activity is fairly modest,

say, $40 an hour to go horseback riding.

But risks are unavoidable and
regularly occur because horses are

regularly frightened by an unexpected
noise and they may react by rearing.

Moreover, there is a risk of

a catastrophic injury such as a
spinal or brain injury from a fall.

In such cases, should the provider
of the activity be allowed to

bargain for a release of liability
even if the provider is negligent?

Courts will have to weigh the extent of

injury against the cost of
insuring against that injury,

while factoring in the
social utility of having

such recreational activities
available at a modest price.

It is very difficult to predict
what a court would conclude.

To enforce a release of liability puts

the whole economic loss
on the injured party.

But to refuse to enforce the
release increases the cost of

the activity and may result in decreased
availability of that activity.

Conversely, to enforce the release

absolves a negligent
party of responsibility,

which may decrease the incentive
of other horse stables to

avoid future negligence and lead
to a greater number of injuries.