Bovard v. American Horse Enterprises, Inc.

California Court of Appeal · Contracts

ContractsIllegalityPublic policyAttorney's feesillegal contractpublic policyCiv. Code 1667Civ. Code 1608

Facts

Bovard had sold American Horse Enterprises, Inc. to Ralph in 1978, and the corporation predominantly produced drug paraphernalia, including roach clips and bongs used to smoke marijuana and tobacco. After the first appeal, Bovard pursued a supplemental complaint based on an alleged settlement of the earlier promissory-note litigation arising from that sale. At trial on the supplemental complaint, Bovard testified to the nature of the corporation's business, prompting the court to consider whether the underlying sale contract was illegal. The trial court found the corporation was not significantly engaged in jewelry production, that its principal business was manufacturing paraphernalia used to smoke marijuana, and that Bovard had recovered the corporate machinery through self-help.

Issue

Whether a contract for the sale of a business primarily engaged in manufacturing marijuana paraphernalia was void as contrary to public policy, even though manufacture of such paraphernalia was not itself expressly illegal when the contract was made. Also, whether Ralph could recover attorney's fees and costs after successfully defending on the ground of illegality.

Rule

Under Civil Code sections 1607, 1667, and 1608, consideration must be lawful, and a contract is void if its consideration is contrary to the policy of express law, even if not expressly prohibited. In deciding whether a contract violates public policy, courts weigh the enforcement interest against the public policy against enforcement, considering factors such as justified expectations, forfeiture, public interest, the strength of the policy, whether nonenforcement would further it, the seriousness of misconduct, and the directness of the connection between the misconduct and the contract. A court must refuse to enforce an illegal contract and will not enforce a settlement or compromise of a claim based on such a contract. When a contract is void for illegality, a contractual attorney-fee provision does not mature.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Fresno, Dana Mercer sold all shares of Sierra Glow Works to Leo Kim. At the time of sale, the company’s main business was making small metal devices specially designed to help users consume a narcotic whose possession and use had long been prohibited by California statute, although no statute yet expressly banned manufacturing those devices.

If Dana sues Leo on a note given for the sale, which is the strongest basis for refusing enforcement under the majority rule?

Explanation. A contract is void if its consideration is contrary to the policy of express law, even when the precise business activity was not expressly prohibited at the time of contracting. The majority relied on the longstanding statutes forbidding possession, use, and transfer of the drug, and treated a business primarily devoted to facilitating that illegal conduct as sufficiently connected to that policy to make the sale contract unenforceable.