Chapter 11: Contracts: Capacity and Legality

Capacity

parties entering into a contract must be able to understand what they’re doing

Legality

all contracts must have a lawful purpose

Contractual capacity

requires a person entering into a contract to be able to understand what they are doing when agreeing to it

Lack of capacity categories

• the mentally incompetent (insanity)

• the intoxicated (intoxication)

• minors (infancy)

Insanity

legal term that describes a person who is mentally impaired to the extent that they are unable to understand the promises rhey are making when entering into a contract

Temporary insanity

a condition in which a person lacks capacity for a certain period of time but then regains capacity later

Legal insanity

result of a number of causes, from traumatic brain injuries to developmental disabilities, dementia, and all sorts of psychological disorders

Adjudged insane

if a court of law declares a person to be legally insane; void contrant

void contract

a contract that will be treated by a court as if no agreement exists

guardian

someone who is legally required to manage the affairs of the person adjudged insane. only this person is legally allowed to enter into contracts on the incapable person’s behalf

voidable contract

treated as a valid enforceable contract by the courts but the insane person has the option to cancel it (dissafirm)

Voidable contract caveats

• only the insane person can disaffirm the agreement

• the insane person must have been insane at the time they agreed to the contract

duty of restitution

the duty to put the other party in the same position they were in prior to a contract

necessaries of life

consist of food, clothing, shelter, and other basic goods and services people need to survive

level of intoxicated person must be ___ to escape the liability of a contract

rather severe

Contract entered into by a intoxicated person are ___

generally voidable

ratification

allows formerly intoxicated person to retain the benefit of any agreement they made while they lacked capacity

Minor

a person who has not reached the age of majority in their state

age of majority

which is the age at which the gov’t has decided a person has the capacity to enter into contract and do all sorts of other things adults do

emancipation of a minor

a declaration by a court that a person who has not yet reached the age of majority is legally an adult and can therefore enter into contracts as an adult

infancy doctrine

the legal presumption that minors lack contractual capacity, is firmly settled

duty of restitution

legal obligation to compensate someone for loss or unjust enrichment

duty of restoration

returning something (or someone) to its original state or condition

Exceptions to a minor’s duty

• any damage to the property by the minor must not have been the result of the minor’s intentional, reckless, or grossly negligent behavior

• the minor cannot have misrepresented their age

Outside of contracts for the necessities of life, parents generally have ___ for contracts entered into by their minor children

no liability

Legality

every contract must have a lawful purpose

illegal contract

contract that has an illegal purpose and is therefore void

illegal consideration

a promise to refrain from doing something illegal

Gambling agreements are __ contracts

illegal

Usury rate

the maximum allowable interest rate under the law

Usurious contracts

if a contract calls for a party to pay an interest rate in excess of the usury rate. Illegal but not always void.

Usurious agreements

• treat usurious contracts as void

• allow the lender to collect the principal amount of the loan, but no interest

• require that a usurious interest rate be modified to bring it in line with the maximum legal interest rate

Public policy

consists of the broad principles a gov’t hopes to implement through specific laws

A contract that is contrary to public is one that has a __ impact on the public

negative

Noncompete agreement

a contract contrary to public is a covenant not to compete

covenant not to compete

an agreement between a company and an individual, whereby the individual agrees not to compete against the company for some period of time after no longer being affiliated with the organization

Reformation

the process. ofa court changing the terms of a contract, with or without the consent of the contracting parties

Licensing statute

a law that requires members of a certain profession to be granted license by a state before engaging in professional activities

Exculpatory clause

a language in a contract where one party promises not to sue the other party for potential future damages, regardless of who is at fault

severable contracts

a contracts that has multiple promises, each with its own individual consideration

individual contract

if the illegal portion of a contract cannot be removed without substantially changing the overall purpose of the contract