Distinguish between illegal wagering contracts and legal risk-shifting and speculative bargaining agreements.
What will be an ideal response?
All states have statutes that either prohibit or regulate gambling. Agreements in violation of these statutes are illegal. A recurring problem in this area is how to tell an illegal wagering contract from legal risk-shifting and speculative bargaining agreements.
When the parties create a new risk for the sole purpose of bearing it, that is an illegal wager. An example is a $25 bet by Jan that the Dolphins will win the Super Bowl. Jan has no financial interest in a Dolphins victory other than that created by the bet. She created the risk of losing the $25 for the sole purpose of bearing that risk. If, however, the parties agree who shall bear an existing risk, that is a legal risk-shifting agreement. Property insurance contracts are classic examples of risk-shifting agreements. The owner of the property pays the insurance company a fee in return for the company's agreement to bear the risk that the property will be damaged or destroyed. If, however, the person who takes out the policy had no legitimate economic interest in the insured property (called an insurable interest in insurance law), the agreement is an illegal wager.
Stock and commodity market transactions are good examples of speculative bargains that are legal. In both cases, the purchasers are obviously hoping their purchases will increase in value and the sellers believe they will not. The difference between these transactions and wagers lies in the fact that the parties to stock and commodities transactions are legally bound to the purchase agreement (although the purchaser may never intend to actually take delivery of the stock or commodity). In an illegal wager, such as a bet on the future performance of a stock or commodity, no purchase is involved.
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