The right of a holder in due course to recover on a negotiable instrument originally given as part of an illegal transaction 26 should be explained in the same way. 26 See infra, § 1676. § 1632. Illustrations of recovery where plaintiff not innocent. In some cases where a refusal to enforce an agreement would produce the very effect which the law seeks to guard against, a corporation is allowed to enforce it, although it was particularly prohibited and made illegal. Thus, for the security of depositors and others, banks are prohibited from entering into certain kinds of loans or purchases. When a contract of this sort has been entered into, however, should the corporation be refused a right of recovery the result would be the impairment of the assets of the bank-the very result which the law seeks to prevent, and, therefore, the bank is allowed to recover.27 It son, 2 Bligh, 305, 348; Spring Co. v. Knowlton, 103 U. S. 49, 26 L. Ed. 347; Pullman Palace Car Co. v. Central Transportation Co., 65 Fed. 158; In re Monongahela Distillery Co., 186 Fed. 220; Compagionette v. McArmick, 91 Ark. 69, 120 S. W. 400; Michener v. Watts, 176 Ind. 376, 96 N. E. 127, 36 L. R. A. (N. S.) 142; Musson v. Fales, 16 Mass. 332; Emery v. Kempton, 2 Gray, 257; Cashin v. Pliter, 168 Mich. 386, 134 N. W. 482, Ann. Cas. 1913 C. 697; Beram v. Kruscal, 18 N. Y. Misc. Rep. 479; Burkholder v. Beetem's Adm., 65 Pa. St. 496. See also Harse v. Pearl Life Assur. Co., [1903] 2 K. B. 92; Mobile, etc., R. R. Co. v. Dismukes, 94 Ala. 131, 10 So. 289, 17 L. R. A. 113 (but see Gulf, etc., Ry. Co. v. Hefley, 158 U. S. 98, 39 L. Ed. 910; Southern Ry. Co. v. Harrison, 119 Ala. 539, 24 So. 552, 43 L. R. A. 385, 72 Am. St. Rep. 936; Gerber v. Wabash R. R. Co., 63 Mo. App. 145; Wyrick v. Missouri, etc., Ry. Co., 74 Mo. App. 406); Cranson v. Goss, 107 Mass. 439, 9 Am. Rep. 45; Small v. Lowrey, 166 Mo. App. 108, 148 S. W. 132; Miller v. Hirschberg, 27 Or. 522, 40 Pac. 506. Compare Webster v. Sanborn, 47 Me. 471. 27 Such contracts were enforced 'under various bank laws in Gold-Mining Co. v. National Bank, 96 U. S. 640, 24 L. Ed. 648; National Bank v. Matthews, 98 U. S. 621, 25 L. Ed. 188; National Bank v. Whitney, 103 U. S. 99, 26 L. Ed. 443; Reynolds v. Crawfordsville Nat. Bank, 112 U. S. 405, 5 S. Ct. 213, 28 L. Ed. 733; Hanover Bank v. First Nat. Bank of Burlingame, 109 Fed. 421, 48 C. C. A. 482, 487; England v. Commercial Bank, 242 Fed. 813, 155 C. C. A. 401; Holden v. Upton, 134 Mass. 177. And see Savings Bank v. Burns, 104 Cal. 473, 38 Pac. 102; Union Mining Co. v. Rocky Mountain Nat. Bank, 1 Colo. 531; Voltz v. National Bank, 158 Ill. 532, 42 N. E. 69; Benton County Bank v. Boddicker, 105 Iowa, 548, 75 N. W. 632, 45 L. R. A. 321, 67 Am. St. Rep. 310; Lester v. Howard Bank, 33 Md. 558, 3 Am. Rep. 211; Allen v. First Nat. Bank, 23 Ohio St. 97; First Nat. Bank v. Smith, 8 S. Dak. 7, 65 N. W. 437; Wroten's Assignee V. Armat, 31 Gratt. 228. A similar decision under Insurance Laws is Bowditch v. New England Mutual Ins. Co., 141 Mass. 292, 4 N. E. 798, may be observed here also that even a guilty party if not thought to be in pari delicto, 28 and if public policy demands it even an equal participant in the illegality, 29 is often allowed relief by way of restitution, though not on the contract. It should also be noticed that an executed illegal transaction though based on agreement is effectual.30 If illegality made contracts void in a literal sense it is hard to see how a transfer based on an illegal agreement could stand. Doubtless a statute may make an attempted contract or sale absolutely void, and instances of such statutes may be found,31 but such a construction will not be adopted unless plainly required by express language or public necessity. Generally the same result is reached when it is said that a guilty party to an illegal bargain cannot enforce it as when it is said that the illegal agreement itself is void, but it is believed that the true reason for the decisions is that which has just been suggested, and that this reason cannot safely be disregarded. Various kinds of illegal contracts may now be considered in detail. 1633. Contracts in restraint of trade. The topic of contracts in restraint of trade includes a large variety of agreements. Any contract which purports to limit in any way the right of either party to work or to do business, 55 Am. Rep. 474. In Mars Nat. Bank v. Hughes, 256 Pa. 75, 100 Atl. 542, the plaintiff bank sued upon a note made by the defendant who testified that the note was given merely to deceive the bank examiner, and that the parties agreed that it should not be enforced against the defendant. The court held that the note was enforceable according to its terms, and that the defendant could not be heard to say that a note which he had voluntarily given, according to his own account, for the purpose of enabling the bank to deceive the bank examiners of the United States was not what it purported to be. Any general inference from this language that a defendant cannot set up his own illegality, shared in by the plaintiff, 29 In Cleveland &c. R. Co. v. Hirsch, 204 Fed. 849, 123 C. C. A. 145, a railroad company, although particeps criminis, was held entitled to maintain a suit for cancellation of a contract of lease for illegality, on the ground that the lease was executory and its enforcement contrary to public policy. 30 See, e. g., Kushner v. Abbott, 156 Ia. 598, 137 N. W. 913, and infra, § 1702. 31 E. g., in Tennessee a Bulk Sale law was held to make sales in violation of it "absolutely void." Cantrell v. Ring, 125 Tenn. 472, 145 S. W. 166. whether as to the character of the work or business, its place, the manner in which it shall be done, or the price which shall be demanded for it, may be called a contract in restraint of trade.32 It is immaterial that the amount of business which may be done under the restraint exceeds the amount which was done or would be done had there been no restraining promise. The term does not indicate that less work or trade will be done but merely that one who does it, or who might do it, has agreed to some restriction. Though strictly speaking any contract imposing any restriction whatever of the class alluded to is in restraint of trade, the term is often used as including only contracts where the restraint is obnoxious to the law. Prolonged litigation was necessary to determine whether the words "restraint of trade" as used in the Sherman Act were used in the strict literal sense including any restriction whatever, or in the sense, also common in legal speech, of restraints unreasonable, and therefore obnoxious to the common law.33 Restraint of trade may be sought by other means than by contract. By what is called unfair competition or by mere aggregation of capital competitors may be put at a disadvantage and a monopoly or something approaching it obtained.34 Here, however, only the validity of contracts can be considered. § 1634. Early law. The early law contains abundant recognition of the evils of monopoly. In general the monopolies which excited attention were not sought or obtained by contract but directly or indirectly by grant or charter from the crown or Parliament; but early criminal statutes against engrossing, regrating and forestalling, indicate that without any such authorization attempts to enhance prices artificially by dealings in the market must have been common. 35 The early decisions on contracts in restraint of trade relate to covenants or conditions in bonds by which the obligor undertook to forego the exercise of his trade either generally or within a certain locality. In an early and 32 See "Trust Laws and Competition" 1915). (U. S. Dept. Commerce 33 See infra, § 1658. 34 See Kales, "Good and Bad Trusts," 30 Harv. L. Rev. 830. 35 See Standard Oil Co. v. United States, 221 U. S. 1, 51, 55 L. Ed. 619, 31 S. Ct. 502. 37 often cited case of this sort,36 the court expressed itself emphatically that such a condition of the bond in suit was void and added "per Dieu," if the plaintiff were here, he should go to prison until he paid a fine to the king. But it was soon held that if a covenant or the condition of a bond imposed a restraint only during a certain time or within a limited place, it was not unlawful. 38 This was so held in the leading case of Mitchel v. Reynolds," where the court elaborately examined the whole question of contracts restraining a party from exercising his trade. § 1635. Reasons for holding restraint invalid. The reasons given in this examination in the case just referred to for the prohibition against general restraints are thus stated after a consideration of the early decisions: "The true reasons of the distinction upon which the judgments in these case of voluntary restraints are founded, are, first, the mischief which may arise from them, 1st, to the party, by the loss of his livelihood, and the subsistence of his family; 2d to the publick, by depriving it of an useful member. "Another reason is, the great abuses these voluntary restraints are liable to; as for instance, from corporations, who are perpetually labouring for exclusive advantages in trade, and to reduce it into as few hands as possible; as likewise from masters, who are apt to give their apprentices much vexation on this account, and to use many indirect practices to procure such bonds from them, lest they should prejudice them in their custom, when they come to set up for themselves. 3dly, because in a great many instances, they can be of no use to the obligee; which holds in all cases of general restraint throughout England; for what does it signify to a tradesman in London, what another does at Newcastle? and surely it would "Y. B. 2 Hen. V, Pl. 26, the action was on a bond conditioned to be void if the obligor refrained for six months from carrying on the trade of dyer in the town where he had previously exercised it. See to similar effect Colgate v. Bacheler, 2 Cro. Eliz. 872. 38 Rogers v. Parry, 2 Bulstr. 136; Jelliet v. Broad, Noy. 98; Broad v. Jollyfe, Cro. Jac. 596. See also Prugnell v. Gosse, Aleyn, 67; Clerk v. Governer & Taylors of Exeter, 3 Lev. 641. 39 1 Peere Wms. 181. be unreasonable to fix a certain loss on one side, without any benefit to the other." 40 In the further development of the subject the emphasis thrown on these reasons has varied, and has differed somewhat in England and in the United States. With the greater ease of changing occupations in modern life, less weight is attached to the reason that the promisor will be rendered a charge upon the community and himself suffer undue hardship. This reason is, moreover, wholly inapplicable where the promisor is a corporation. The modern English law has thrown the emphasis almost entirely upon the impropriety of requiring a promise greater in extent than is required for the needs of the promisee, since thereby the promisor would be injured without any corresponding advantage to the promisee. The American law, on the other hand, has been chiefly concerned with the injury to the public; not that arising indirectly from the injury to the promisor, but that arising from lack of competition, with the consequent tendency to at least a partial monopoly owing to the withdrawal of the promisor from the field. Though emphasis thus varies, it is true in the United States, as well as in England, that a covenant exceeding the reasonable requirements of the promisee may be unlawful for that reason alone. 41 If the agreement affects interstate trade or commerce, its validity will be judged by Federal law and not by that of the State where the contract was made.42 § 1636. Reasonableness of restraint. It is everywhere agreed that in order to be valid a promise 40 Mitchel v. Reynolds, 1 Peere Wms. 181, 190. 41 See infra, § 1641, n. 75. The general rule most frequently quoted in England and America is laid down in Horner v. Graves, 7 Bing. 735, 743. "We do not see how a better test can be applied to the question whether reasonable or not, than by considering whether the restraint is such only as to afford a fair protection to the interests of the party in favour of whom it is given, and not so large as to interfere with the interests of the public. Whatever restraint is larger than the necessary protection of the party, can be of no benefit to either, it can only be oppressive; and if oppressive, it is, in the eye of the law, unreasonable. Whatever is injurious to the interests of the public is void, on the grounds of public policy." 42 Hall Mfg. Co. v. Western Steel & Iron Works, 227 Fed. 588, 142 C. C. A. 220, L. R. A. 1916 C. 620. |