The Public Policy Doctrine and Enforceability

• Jurisdiction: Maryland

II. The Public Policy Doctrine and Enforceability

A. In General

In a sense, our entire society is based on the notion of freedom of contract. The great legal, political, and economic thinkers all seem to be in agreement on this point. The English legal historian Sir Henry Sumner Maine pointed out that Western society had evolved from authority based on status to authority based on agreement. Professor Williston, who along with Professor Corbin is considered one of the most important modern contract scholars, remarked that the likes of Adam Smith, Jeremy Bentham, and John Stuart Mill "successively insisted on freedom of bargaining as the fundamental and indispensable requisite of progress."⁹

Nonetheless, courts of every jurisdiction, Maryland included, have had occasion to strike down freely entered contracts between consenting adults with unquestioned legal capacity on the basis that the effect of the contract (or contractual clause) so offended societal notions of equity and fairness that they could not stand. In doing so, the courts most often refer to "public policy" as the justification for their actions. Public policy is an amorphous but ubiquitous concept that has been referred to as the "unruly horse" of the law.¹⁰ Black's Law Dictionary defines it as "including the collective rules, principles, or approaches to problems that affect the commonwealth or promote the general good and it specifically refers to those principles and standards regarded by the legislature or by the courts as being of fundamental concern to the state and the whole of society."¹¹ It embodies the principle that a person should not be allowed to do anything that would tend to injure the public at large. As noted in that work, courts sometimes use the term to justify their decisions, as when declaring a contract void because it is "contrary to public policy."

In fact, the U.S. Supreme Court has held that, if alternative interpretations of contract language are possible, a court is compelled to choose the one that furthers public policy (whatever that means). In Mastrobuono v. Shearson Lehman Hutton, Inc.,¹² the Court was confronted with a contract that arguably invoked well-established New York law forbidding arbitrators to award punitive damages. In order to "further public policy," however, the justices found a way to interpret the contract so that such punitive damages actually awarded by an arbitrator could be enforced.

In Maryland-National Capital Park & Planning Commission v. Washington National Arena,¹³ the Court of Appeals stated that the courts of this state adhere to the "classic formulation" of the so-called public policy doctrine, which describes the term as:

[T]hat principle of the law which holds that no subject can lawfully do that which has a tendency to be injurious to the public, or against the public good, which may be termed, as it sometimes has been, the policy of the law, or public policy in relation to the administration of the law.

Judge Levine went on to comment:

But beyond this relatively indeterminate description of the doctrine, jurists to this day have been unable to fashion a truly workable definition of public policy. Not being restricted to the conventional sources of positive law (constitutions, statutes and judicial decisions), judges are frequently called upon to discern the dictates of sound social policy and human welfare based on nothing more than their own personal experience and intellectual capacity. Inevitably, conceptions of public policy tend to ebb and flow with the tides of public opinion, making it difficult for courts to apply the principle with any degree of certainty. Public policy . . . is but a shifting and variable notion appealed to only when no other argument is available, and which, if relied upon today, may be utterly repudiated tomorrow.¹⁴

Despite Judge Levine's misgivings, public policy is an important impediment to crafting an enforceable agreement to which contract drafters would be well advised to give more than merely a passing consideration. The Maryland Uniform Computer Information Transactions Act (UCITA), which was added to Maryland law in 2000 and is found in Title 22 of the Commercial Law Article, makes the following statement about public policy as it relates to contracts:

If a term of a contract violates a fundamental public policy, the court may refuse to enforce the contract, enforce the remainder of the contract without the impermissible term, or limit the application of the impermissible term so as to avoid a result contrary to public policy, in each case to the extent that the interest in enforcement is clearly outweighed by a public policy against enforcement of the term.¹⁵

As described by Judge Levine's comments noted above, public policy emanating from the common law can be hard to articulate and even harder to predict. Courts, sometimes seemingly at whim, will announce that a contract or contract provision is unenforceable because, well, it is just not right. For example, it is not surprising that courts will refuse to honor a contract that attempts to "sell" the custody of a child for monetary consideration. Such a contract was entered into by the late Jane C. Clark in the early part of the last century. Jane's marriage to Howard Clark had produced a daughter, Edna. Eventually, Howard and Jane divorced, and Edna was given to the care and custody of Jane. Jane soon found herself in financial difficulty as Howard was apparently in no position to pay adequate child support. Howard's father, Stephen Clark, however, was a man of substantial means.

Stephen Clark offered to pay Jane's living expenses if Jane would give up custody of Edna to her ex-husband, his son. The two entered an agreement for such an arrangement, which was later alleged by Stephen Clark to be unenforceable on public policy grounds. It seems that, once custody had been transferred, Stephen had second thoughts about actually paying Jane what he had promised (assuming, of course, that he ever had first thoughts about paying her). The Court of Appeals turned a deaf ear to Stephen's complaint of the running afoul of public policy, citing the fact that the contract was actually predicated on the objective of achieving the best welfare for the child and was not merely the sale of custodial rights to a stranger.¹⁶ One wonders if a public policy analysis would have produced the same results if it were Stephen who had been trying to enforce the contract.

There can be no question that a contract in which one or more of the parties agrees to break the law will not be enforceable. It is axiomatic that a court will refuse to enforce a contract that is either illegal in purpose or made by a person lacking the legal qualifications to contract. For example, it has been recognized by the Court of Appeals since at least the 1890 case of Emerson v. Townsend¹⁷ that an agreement to pay a gambling debt is unenforceable due to the illegal nature of the underlying activity. The Court of Appeals has frequently recognized in a variety of circumstances that, in order to discourage practices forbidden by law, contracts made or performed in violation of the requirements or prohibitions of a statute are held to be illegal as against public policy and ordinarily will not be enforced.

Queen v. Agger¹⁸ dealt with the provisions of Maryland's worker's compensation statute that prohibits health care providers from collecting fees not approved by the Worker's Compensation Commission. Michael J. Queen was injured in an industrial accident. As a result of the nature of the his injuries, his treating physician referred him to Eloise Agger, a licensed clinical social worker, for psychotherapy. Queen and Agger entered into an oral contract in which she agreed to treat him, and he agreed to be responsible for the payment for her services. The total bill for the psychotherapy treatments rendered to Queen by Agger was $5,200. The Worker's Compensation Commission approved an amount of $3,160 for these treatments, which was paid to Agger. Agger then sued Queen for the balance of $2,040. In denying Agger's claim, the Court of Appeals stated that the requirement of Commission approval was for the purpose of protecting the economic integrity of injured employees by preventing unreasonable or excessive charges for health care; therefore, an agreement to pay an amount above that which was approved is void.

Where a statute requires that a contract must comply with specific regulations, the Maryland courts have held that there must be compliance. In Webb v. Haeffer¹⁹ a case involving a failure to comply with statutory requirements applicable to a mortgage foreclosure (then under art. 64, § 14), the Court of Appeals stated:

The language of the 14th section is express in its terms, that all mortgage sales shall be made in the county or city where the mortgaged premises are situated, unless they are situated in more counties than one, and then the sale may be made in either county in which the lands lie. This language is so plain that it can admit of but one interpretation. It is mandatory and binding, and a party, who proceeds under a power authorized by Art. 64, must do so in the mode and manner pointed out in its several sections. Parties are ordinarily left free to contract, but they will not be permitted to do so in violation of statute regulations.

But there is a recognized exception in cases where a denial of recovery would impose a penalty out of all proportion to the public good, particularly where the violation is not of a serious nature and merely incidental to the performance of the contract. This exception generally applies when the violation is relatively minor and merely incidental to the real essence of the contract.

In Schloss v. Davis²⁰ Dan Schloss and Walter Davis entered into an agreement whereby a new house would be built for the former in Baltimore County. Davis agreed to supervise the construction. At the...