Bovard v. American Horse Enterprise, Inc.

Puglia, Presiding Justice. Robert Bovard appeals from the judgment dismissing his supplemental complaint against defendants, American Horse Enterprises, Inc., and James T. Ralph. Bovard contends the trial court erroneously concluded the contract upon which his action was founded was illegal and void as contrary to public policy. . . . The court found that the corporation predominantly produced paraphernalia used to smoke marijuana and was not engaged significantly in jewelry production, and that Bovard had recovered the corporate machinery through self-help. The parties do not challenge these findings. The court acknowledged that the manufacture of drug paraphernalia was not itself illegal in 1978 when Bovard and Ralph contracted for the sale of American Horse Enterprises, Inc. However, the court concluded a public policy against the manufacture of drug paraphernalia was implicit in the statute making the possession, use and transfer of marijuana unlawful. . . . The trial court held the consideration for the contract was contrary to the policy of express law, and the contract was therefore illegal and void . . .

. . . Whether a contract is contrary to public policy is a question of law to be determined from the circumstances of the particular case . . . Here, the critical facts are not in dispute. Whenever a court becomes aware that a contract is illegal, it has a duty to refrain from entertaining an action to enforce the contract . . . Furthermore the court will not permit the parties to maintain an action to settle or compromise a claim based on an illegal contract.

The question whether a contract violates public policy necessarily involves a degree of subjectivity. Therefore, ". . . courts have been cautious in blithely applying public policy reasons to nullify otherwise enforceable contracts. This concern has been graphically articulated by the California Supreme Court as follows: 'It has been well said that public policy is an unruly horse, astride of which you are carried into unknown and uncertain paths, . . . While contracts opposed to morality or law should not be allowed to show themselves in courts of justice, yet public policy requires and encourages the making of contracts by competent parties upon all valid and lawful considerations, and courts so recognizing have allowed parties the widest latitude in this regard; and, unless it is entirely plain that a contract is violative of sound public policy, a court will never so declare. " The power of the courts to declare a contract void for being in contravention of sound public policy is a very delicate and undefined power, and, like the power to declare a statute unconstitutional, should be exercised only in cases free from doubt." [Citation.] . . . "No court ought to refuse its aid to enforce a contract on doubtful and uncertain grounds. The burden is on the defendant to show that its enforcement would be in violation of the settled public policy of this state, or injurious to the morals of its people. . . .

Bovard places great reliance on Moran v. Harris, supra, to support his argument the trial court erred in finding the contract violative of public policy. In Moran, two lawyers entered into a fee splitting agreement relative to a case referred by one to the other. The agreement was made in 1972, 10 months before the adoption of a rule of professional conduct prohibiting such agreements. In 1975, the attorney to whom the case had been referred settled the case, but then refused to split the attorney's fees with the referring attorney. . . . The trial court held the fee splitting contract violated public policy. The appellate court reversed, noting the rule of professional conduct had been amended effective January 1, 1979, to permit fee splitting agreements; thus there was no statute or rule prohibiting fee splitting agreements either at the time the attorneys' contract was formed or after January 1, 1979, during the pendency of the action to enforce the fee splitting contract. . . Here, in contrast to Moran, there is positive law on which to premise a finding of public policy . . on a statute prohibiting the possession, use and transfer of marijuana which long antedated the parties' contract.

Moran suggests factors to consider in analyzing whether a contract violates public policy: Before labeling a contract as being contrary to public policy, courts must carefully inquire into the nature of the conduct, the extent of public harm which may be involved, and the moral quality of the conduct of the parties in light of the prevailing standards of the community. . . .

. . . Applying the Restatement test to the present circumstances, we conclude the interest in enforcing this contract is very tenuous. Neither party was reasonably justified in expecting the government would not eventually act to geld American Horse Enterprises, a business harnessed to the production of paraphernalia used to facilitate the use of an illegal drug. Moreover, although voidance of the contract imposed a forfeiture on Bovard, he did recover the corporate machinery, the only assets of the business which could be used for lawful purposes, i.e., to manufacture jewelry. Thus, the forfeiture was significantly mitigated if not negligible. Finally, there is no special public interest in the enforcement of this contract, only the general interest in preventing a party to a contract from avoiding a debt.

On the other hand, the Restatement factors favoring a public policy against enforcement of this contract are very strong. As we have explained, the public policy against manufacturing paraphernalia to facilitate the use of marijuana is strongly implied in the statutory prohibition against the possession, use, etc., of marijuana, a prohibition which dates back at least to 1929. . . Obviously, refusal to enforce the instant contract will further that public policy not only in the present circumstances but by serving notice on manufacturers of drug paraphernalia that they may not resort to the judicial system to protect or advance their business interests. Moreover, it is immaterial that the business conducted by American Horse Enterprises was not expressly prohibited by law when Bovard and Ralph made their agreement since both parties knew that the corporation's products would be used primarily for purposes which were expressly illegal. We conclude the trial court correctly declared the contract contrary to the policy of express law and therefore illegal and void. . . .