10 / 16 / 2015

Faustian Bargains in Texas?  Say it Ain’t So.

The axiom pounded into all Texas lawyers and business people is that Texas is a Pro-Contract state.  That does not mean, however, that every contract is enforced by courts.  In German folklore, Faust was said to have bargained his soul to Mephistopheles (aka the DEVIL) for unlimited and supreme knowledge.  The Devil eventually collects on the debt, in most versions, and Faust is forever damned.  Similar stories, but with overly strict contract interpretation are found in other famous literary pieces, such as Shakespeare’s the Merchant of Venice.  But how realistic is it to be shackled to a contract?  When is a contract not a contract?  If the Devil is involved, that is a pretty good lead in, but what about deals that should not be enforced.

Vethan Law Firm, P.C. (VLF)’s series of blogs focuses on issues of contract enforcement.  Our first blog focuses on some cases when contracts are not enforceable.

The Language of the Deal

We have touched on the topic several times in our various blog posts in the last few months.  The Texas Supreme Court regularly upholds the plain language of contracts entered voluntarily between the parties, even where the contract may end up in a result which your gut tells you is unfair.  See our blog on the recent Texas Supreme Court decision Ritchie v. Rupe for an in-depth discussion of a sample topic.

You Shall Not Pass

Gandalf took his stand on the bridge of Khazad-dum, and told the Balrog “you shall not pass,” to keep the Flame of Udun away from his friends.  Although Texas courts do not wield Glamdring, is there a line that a Texas court is not willing to cross?  Yes, even in this pro contract jurisdiction, Texas courts do not enforce contracts that are illegal more often than you think.  Texas Courts will not enforce illegal contracts.  Take cocaine.  Not literally, but by example: a cocaine dealer could not sue a cocaine buyer who fails to pay for the cocaine.  In that case, the contract is illegal because it is illegal to buy, sell, or possess cocaine.  The underlying concept is that a contract to fulfill an obligation which cannot be performed without violating the law contravenes public policy and is void. [1]

Of course, the cases decided on the grounds the underlying contract is illegal are not as egregious as the cocaine example above.  So when does it come into play?  It comes into play whenever a contract is illegal.  In this context an illegal contract is one in which the parties undertake what the law forbids. [2]

The Commission Contract without a License

The State of Texas, in an effort to protect the public, requires that certain professionals maintain licenses and uphold certain ethical obligations that are not imposed on other workers.  What is a consequence of being in a licensed profession?  Well, if you are providing (and charging) for services that require a license, but do not in fact have a license, then a Court could hold your contract void for illegality.  This can happen to real estate agents and brokers, attorneys, doctors, or any other governmentally regulated and supervised statutory licensing scheme.  The unlicensed participation in regulated business cannot for the basis of recovery.  McCreary v. Bay Area Bank & Trust, 68 S.W.3d 727, 733 (Tex.App.-Houston [14th Dist.] 2001, pet. didm'd)

Unfair, Unjust and The Value of the Work

Now, despite the underlying black and white logic of: if a contract is illegal, then it is unenforceable; some courts have held that certain equitable exceptions apply.  Just so everyone is on the same page, this is where the deal is found to be illegal, but in fairness and equity, Texas courts will enforce some part of the contract under a theory of quantum meruit.  That is fancy Latin for getting all or part of what is due, even if the contract is legally void, based on it being just, fair and equitable.  No seriously.  That is a thing.  Even in a pro contract state.

The principle is well established that, where one receives a benefit by accepting the services of another, even though performed in pursuance of an invalid or illegal contract, nevertheless such person is bound upon the plainest principles of equity for the reasonable value of such services. [3]

Texas Courts permitted recovery under this equitable theory even where the underlying contract was illegal in the following three circumstances: [4] expert fees despite the fact the expert and attorney had contracted for an illegal fee sharing agreement; [5]  where  the plaintiff did not enter the contract voluntarily and did not violate the law even though the contract was illegal; and for a bank who loaned money to the city despite the underlying purpose being illegal (purchasing port-a-potties; no not kidding). [6]

However, as an equitable claim, quantum meruit requires you be on the non-law breaking side of the scale.  These cases listed are the exception rather than the rule as most holdings are that if a contract is illegal and therefore void, there can be no equitable recovery.  This is because that same person generally also has “unclean hands” a doctrine which bars any equitable recovery.

Keeping the Devil out of Your Details

If you are involved in a dispute where either the underlying contract was illegal, or the parties failed to have a license necessary for the lawful performance of that contract, there is an added level of complexity which will need to be addressed in order to be successful in the courtroom.

To avoid a deal that takes too many good intentioned paths, leading to bad places, or illegal places, visit with the business and contract lawyers at VLF.  Let’s see if we can keep the devil out of the details of your next deal.

[1] See Lewis v. Davis, 199 S.W.2d 146, 148–49 (Tex. 1947); Gupta v. E. Idaho Tumor Inst., Inc., 140 S.W.3d 747, 751 (Tex.App.—Houston [14th Dist.] 2004, pet. denied)

[2] Franklin v. Jackson, 847 S.W.2d 306, 309 (Tex.App.--El Paso 1992, writ denied)

[3] Blalack v. Johnson, 293 S.W.2d 811, 819 (Tex. Civ. App. 1956)

[4] Reich & Binstock, LLP v. Scates, 455 S.W.3d 178, 184 (Tex. App. 2014)

[5] Sw. Underground Supply & Envtl. Servs. V. Amerivac, Inc., 894 S.W.2d 15, 18 (Tex. App. 1994)

[6] Peoples Nat’l Bank v. Tyler, 141 S.W. 2d 1021, 1023 (Tex. Civ. App. 1940)

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