MGMT 312 Chapter 14: Capacity

Capacity

Legal ability to enter into a contract; presumption of capacity, but can be refuted

Minors

1. Not void but voidable at the option of the minor

2. Express intent to disaffirm entire contract, not just the part and return any goods

3. Any time while minor and reasonable time after 18

4. Once 18, minor can also ratify a contract; once ratified, can no longer disaffirm

5. Parents are not liable for contracts made by minor children, and can not void the contract

Exception for minors

Necessities

What if goods minor has are gone or damaged when the minor disaffirms?

Majority: minor must only return goods that are in minors possession or control

Minority view: if goods are damaged, the minor is required to compensate with reasonable amount for damages

Misrepresentation of age

1) In some states, if a minor has misrepresented his or her age to enter a contract, the minor may still disaffirm

2) Other states have statutes prohibiting minors who misrepresent their age from later disaffirming contracts

Necessaries

Minor may disaffirm a contract for necessaries, but is liable for the reasonable value of necessaries used by minor

*insurance is not necessary

Ratification

A contract will be enforcable if the minor indicates an intention to be bound after reaching age of majority

Express ratification

Implied ratification

-Orally or in writing

-takes action or engages in conduct that clearly indicates intent to abide by contract

Parent liability

-Not liable for performance of a contract unless they were a party of the contract (or necessaries)

-Not liable for torts committed, but may be for negligence

Intoxication

Voidable if person was so intoxicated that their judgement was impaired and they did not comprehend nature of transaction and legal consequences

-If they did understand consequences, it is not voidable

-Voidable if contract fraudulently induced person to become intoxicated

Intoxaicated contract

-may be disaffirmed while a person is intoxicated, or reasonable time after sober

-restitution must be made

-intoxicated person must pay reasonable value for necessaries used

Mentally incompetent, when the contract will void

1. A person is declared judicially incompetent, and

2. A guardian is appointed to represent

3. Void automatically, only their guardian can enter into a contract for them

When a mentally incompetent contract will be voidable

1. Person is considered mentally incompetent if their judgement is impaired because they did not understand contratc

2. Once standard is proven, they can disaffirm in reasonable time

3. Only voidable by incompetent

Valid mentally incompetent contract

Lucid interval: Period when the persons intelligence and judgement are temporarily restored

Contracts to commit crimes

1. Agreements are void

2. If purpose/performance becomes illegal, parties are discharged from obligations

Usury

Ursury statues fix the maximum lawful contract rate of interest that can be charged for a loan or money

Usury exceptions

1. Corporate loans

2. Consumer credit/credit card debt

Gambling

1. Creation of risk and ditribution of property by chance among persons who have given consideration to participate

2. In general, gambling contracts are illegal and void, but some states have statues that regulate gambling

Licensing statues

when a license is required to engage in certain trades, professions, businesses

Enforceability of contracts made by unlicensed individuals

1) Some statues expressly provide that contracts made are void and unenforcable

2) If the purpose of a statue is regulatory, contracts are void and unenforcable

3) If the purpose of a statue is merely to raise govt revenue, enforceable

Contracts contrary to public policy

an agreement which injures an established interest of society or which has a negative effect on society is void

Contracts in restraint of trade

if two or more parties enter into an agreement in which they exchange mutual promises not to compete, the agreement is void because it is against fair competition

Ancillary covenant not to compete

will be enforced if reasonable

1. Covenant not to compete must be secondary

2. Must be no more extensive than nevessary under circumstances to protect property or other valuable interest

Contract for the sale of a business

1. reasonableness of an ancillary covenant not to compete is determined by nature, period of duration, and geographic area covered

Employment contracts

1) A covenant that an employee will not start a competing business for a certain period after termination

2) Legal as long as time period and geo area restrictions are reasonable

Unconscionable contracts

1) if a party is receiving an unusually greater benefit has superior bargaining power

2) will be unconscionable if it shocks conscience of court

Exculpatory clause

Contractual provision that releases a party from liability in the event of monetary or physicaly injury, regardless of who is at fault

Exculpatory clause is not enforced when party seeking enforcement engages in business important to public such as

1) Employment contracts

2) Rental of commercial property

3) Residential property leases

Exculpatory clauses are often enforced when parties are not engaging in businesses essential to public

1) Parties must have equal bargaining power

2) Language must not be ambiguous

Discriminatory contracts

Promises to discriminate based upon color, race, religion, national origin, or gener

Effects of illegality

General rule: void

Exceptions to general rule

1) justifiable ignorance

2) a member of a class intended to be protected by a statue may enforce

3) withdrawl from illegal agreement before illegal performance tendered

4) Contract illegal through fraud, duress, or undue influence

Servable, or divisible, contracts

Courts will enforce the legal provisions of a contract if the illegal portions can be severed