Legality While reading, pay close attention to the various ways in which an agreement may not be legal, including instances of usury, gambling, violation of Sabbath laws, agreements made to commit a crime or tort, and agreements made by a party without proper licensure. CONCEPT REVIEW: To be enforceable, contracts must have legal subject matter and must be able to be performed legally. They cannot violate either state or federal law. A contract overturned for illegal subject matter or for being illegal to perform is generally declared void. A contract need not be in violation of a statute to be illegal; agreements against generally accepted public policy are also illegal and unenforceable. Read the hypothetical below and answer the accompanying questions. Eugene's dream is to open his own restaurant. The only problem is he does not have the financial backing for this endeavor. He repeatedly tries to get a loan from a bank or other commercial lender, but he's denied each time. Desperate for the funds, Eugene gets the contact information for a loan shark and decides to enter into a private loan agreement. The only catch is that Eugene will have to pay an interest rate of 20%, which is double the maximum allowed interest rate in his state.
1. Although Eugene has some reservations about entering into the agreement, he accepts anyway. The situation in the case study above is an example of what type of generally illegal agreement? Explain why this type of agreement is generally illegal.
2. What would happen if this agreement actually occurred? In other words, how do states treat this type of illegal agreements once they are formed? Suppose that a court determined that both parties were at fault for this illegal agreement. What would the effect of the illegal agreement be? In other words, what would happen to the agreement if both parties are at fault?