BLW Final Exam ULTIMATE GUIDE

Contractual capacity

The legal ability to enter into contracts

How is contractual capacity determined?

• A person who has been determined by a court to be mentally incompetent

• A party with capacity to enter into a valid contract but with the right to avoid liability under it

Age of majority

The age at which one is no longer a minor

• In almost all states, the age of majority for contractual purposes is eighteen years.

Minority status may be terminated by:

• Marriage (in some states)

• A minor’s emancipation (the act of being freed from parental control)

What is the general rules of minors?

They can enter into any contract that an adult can, except contracts prohibited by law.

What is unique when it comes to contracts made by minors?

It is voidable at the option of that minor, subject to certain exceptions.

Disaffirmance

Legal avoidance, or setting aside, of a contractual obligation.

To disaffirm, a minor must:

• Express their intent, through words or conduct, not to be bound to the contract

• Disaffirm the entire contract, not merely a portion of it

What can an adult who enters into a contract with a minor not do?

They cannot avoid their contractual duties on the ground that the minor can do so.

• Unless the minor exercises the option to disaffirm the contract, the adult party normally is bound by it.

• On disaffirming a contract, a minor normally can recover any property transferred to the adult as consideration, even if the property is in the possession of a third party.

Disaffirmance Within a Reasonable Time

A contract can ordinarily be disaffirmed at any time during minority or for a reasonable period after the minor reaches the age of majority

Minor’s Obligations on Disaffirmance

Courts in most states hold that the minor need only return the goods (or other consideration) subject to the contract, provided the goods are in the minor’s possession or control.

• A growing number of states place an additional duty of restitution on the minor to restore the adult party to the position they held before the contract was made.

  • These courts may hold a minor responsible for damage, ordinary wear and tear, and depreciation of goods that the minor used prior to disaffirmance.

Exceptions to a Minor’s Right to Disaffirm

Necessaries—Necessities required for life, such as food, shelter, clothing, and medical attention.

• A minor disaffirms but remains liable for the reasonable value of the goods

• Contracts for necessaries are enforceable only to the level of value needed to maintain the minor’s standard of living.

Disaffirmance and Business Contracts

• In many states, certain business contracts entered into by minors cannot be disaffirmed.

• In those states, if minors do business or engage in employment in the manner of adults, their related contracts are fully enforceable.

Ratification (definition)

The act of accepting and giving legal force to an obligation that previously was not enforceable.

A minor who has reached the age of majority can ratify a contract expressly or impliedly.

• Express ratification takes place when the individual, on reaching the age of majority, states orally or in writing the intention to be bound by the contract.

• Implied ratification takes place when the minor, on reaching the age of majority, indicates an intent to abide by the contract.

If a minor fails to disaffirm a contract within a reasonable time after reaching the age of majority…

the court must determine whether the conduct constitutes ratification or disaffirmance.

Parents’ Liability

• General rule, parents are not liable for contracts made by minor children acting on their own, except contracts for necessaries, which parents are legally required to provide.

• Businesses ordinarily require parents to cosign any contract made with a minor.

  • The parents then become personally obligated under the contract to perform the conditions of the contract, even if their child avoids liability.

Intoxication

capacity to act or think is inhibited by alcohol or some other drug.

Contract can be either

voidable or valid.

Voidable

If they were sufficiently intoxicated to lack mental capacity

Valid (Enforceable)

Despite intoxication, they understood the legal consequences of the agreement.

What do courts look at to determine if a person possessed or lacked the required capacity.

Courts look at objective indications of the intoxicated person’s condition

Disaffirmance

• If a contract is voidable because one party was intoxicated, that person has the option of disaffirming it while intoxicated and for a reasonable time after becoming sober.

• The person claiming intoxication typically must be able to return all consideration received unless the contract involved necessaries.

• Contracts for necessaries are voidable, but the intoxicated person is liable in quasi contract for the reasonable value of the consideration received.

Ratification

• An intoxicated person, after becoming sober, may ratify a contract expressly or impliedly, just as a minor may do on reaching majority.

• Implied ratification occurs when a person enters into a contract while intoxicated and fails to disaffirm the contract within a reasonable time after becoming sober.

• Acts or conduct inconsistent with an attempt to disaffirm will also normally ratify the contract. − Example: The continued use of property purchased under a voidable contract

Contracts made by mentally incompetent persons can be either

• Void

• Voidable

• Valid

When the Contract Will Be Void

If a court has previously determined that a person is mentally incompetent, any contract made by that person is void—no contract exists.

When the Contract Will Be Voidable

If a court has not previously judged a person to be mentally incompetent but the person was incompetent at the time the contract was formed, the contract may be voidable.

The contract is voidable in either of the following two conditions:

• The person did not know that they were entering into the contract.

• The person lacked the mental capacity to comprehend its nature, purpose, and consequences.

In such situations, the contract is voidable (or can be ratified) at the option of the mentally incompetent person but not at the option of the other party.

When the Contract Will Be Valid

A contract entered into by a mentally ill person (not previously declared incompetent) may be valid if the person had capacity at the time the contract was formed.

Lucid intervals

periods during which their intelligence, judgment, and are temporarily restored.

• During such intervals, they will be considered to have legal capacity to enter into contracts.

For a contract to be valid and enforceable…

it must be formed for a legal purpose.

Contracts to Commit a Crime

• Any contract to commit a crime is a violation of a statute.

• Sometimes, the object or performance of a contract is rendered illegal by a statute after the parties entered into the contract.

  • In that situation, the contract is considered to be discharged (terminated) by law.

Usury

a statute that sets the maximum rate of interest that can be charged for different types of transactions, including ordinary loans.

Gambling

the creation of risk for the purpose of assuming it.

• Any scheme that involves the distribution of property by chance among persons who have paid valuable consideration for the opportunity (chance) to receive the property is gambling.

Licensing Statutes

Members of certain professions must have licenses.

Competency Based

statute’s purpose is to protect the public from unauthorized practitioners, then a contract involving an unlicensed practitioner is generally illegal and unenforceable.

Revenue Raising

statute’s purpose is merely to raise government revenues, a court may enforce the contract and fine the unlicensed person.

Although contracts involve private parties, some are not enforceable because of the negative impact they would have on society:

• These contracts are said to be contrary to public policy.

• Examples: A contract to commit an immoral act, such as selling a child; a contract that prohibits marriage

Business contracts that may be against public policy include:

• Contracts in restraint of trade

• Unconscionable contracts or clauses

Contracts in Restraint of Trade

(anticompetitive agreements) generally are unenforceable because they are contrary to public policy.

• Typically, such contracts violate one or more federal or state antitrust statutes

An exception is recognized when the restraint is:

• Reasonable

• Contained in an ancillary (secondary or subordinate) clause in a contract

Such restraints often are included in:

• Contracts for the sale of an ongoing business

  • Employment contracts

Covenant not to compete

A contractual promise to refrain from competing with another party for a certain period of time and within a certain geographic area.

• Provided the restrictive covenant is reasonable and is an ancillary part of the sale of an ongoing business, it is enforceable.

Although covenants not to compete restrain trade, they are commonly found in:

• Partnership agreements

• Business sale agreements

• Employment contracts

Covenants Not to Compete in Employment Contracts

People in management positions commonly agree not to work for competitors or not to start competing businesses for a period of time after termination of employment.

• Companies sometimes also use these covenants as the starting point for lawsuits against competitors.

Noncompete agreements are legal in most states so long as:

• The specified period of time (of restraint) is not excessive in duration.

• The geographic restriction is reasonable.

Enforcement Issues

The laws governing the enforceability of covenants not to compete vary significantly from state to state.

• Occasionally, depending on the jurisdiction, courts will reform covenants not to compete.

Reformation

A court-ordered correction of a written contract so that it reflects the true intentions of the parties.

Covenants Not to Compete in Employment Contracts: (Expanded)

• California has statutorily declared against public policy

• Federal Legislation Introduced: “Freedom To Compete Act”

Federal Legislation Introduced: “Freedom To Compete Act”

• Amend the FLSA

• As currently drafted would not apply to certain exempt employees ad defined under the FLSA

Unconscionable Contracts or Clauses

• In certain circumstances, however, bargains are so oppressive that the courts relieve innocent parties of part or all of their duties.

• Such bargains are deemed unconscionable because they are so unscrupulous or grossly unfair as to be “void of conscience.”

Unconscionable contract or clause

A contract or clause that is void on the basis of public policy because one party is forced to accept terms that are unfairly burdensome and that unfairly benefit the dominating party.

• A contract can be unconscionable on either procedural or substantive grounds.

Exculpatory clause

A clause that releases a contractual party from liability in the event of monetary or physical injury, no matter who is at fault.

• Most courts view exculpatory clauses with disfavor because they often violate public policy

However, courts will enforce exculpatory clauses if:

• They are reasonable.

• They do not violate public policy.

• They do not protect parties from liability for intentional misconduct.

• The language used is not ambiguous.

• The parties are in relatively equal bargaining positions.

Discriminatory Contracts

Contracts in which a party promises to discriminate on the basis of race, color, national origin, religion, gender, age, or disability are contrary to both statute and public policy and are thus unenforceable.

• In general, an illegal contract is void

that is, the contract is deemed never to have existed, and the courts will not aid either party.

In most illegal contracts, both parties are considered to be equally at fault—in pari delicto:

• If the contract is executory (not yet fulfilled), neither party can enforce it.

• If it has been executed, neither party can recover damages.

Usually, the courts are not concerned if one wrongdoer in an illegal contract is unjustly enriched at the expense of the other.

Justifiable Ignorance of the Facts

Sometimes, one of the parties to a contract has no reason to know that the contract is illegal and thus is relatively innocent.

• That party can often recover any benefits conferred in a partially executed contract.

• In this situation, the courts will not enforce the contract but will allow the parties to return to their original positions.

• Sometimes, a court may permit an innocent party who has fully performed under the contract to enforce the contract against the guilty party

Members of Protected Classes

When a statute is clearly designed to protect a certain class of people, a member of that class can enforce a contract in violation of the statute even though the other party cannot.

Withdrawal from an Illegal Agreement

If the illegal part of a bargain has not yet been performed, the party rendering performance can withdraw from the contract and recover the performance or its value.

Contract Illegal Through Fraud, Duress, or Undue Influence

the second party will be allowed to recover for the performance or its value.

Severable, or Divisible, Contracts

A contract that is severable, or divisible, consists of distinct parts that can be performed separately, with separate consideration provided for each part.

Voluntary consent

Knowing and voluntary agreement to the terms of a contract

Voluntary consent may be lacking because of:

• A mistake

• Misrepresentation

• Undue influence

• Duress

A lack of voluntary consent (assent)…

can be used as a defense to the contract’s enforceability.

What mistake has to be performed for a contract to be voidable?

must be a mistake of fact

Do mistakes of value or quality make a contract voidable?

No. They do not make a contract voidable.

Mistakes of fact occur in two forms

• Bilateral

• Unilateral

Involve some material fact:

A fact that a reasonable person would consider important when determining their course of action

Unilateral mistake

One party to a contract is mistaken as to a material fact.

Unilateral mistake (General Rule)

does not give the mistaken party right to relief from the contract

Unilateral Mistakes of Fact (Exceptions)

• The other party knows or should have known that a mistake of fact was made.

• The error was due to a substantial mathematical mistake was made inadvertently and without gross (extreme) negligence.

• The mistake must still involve some material fact.

Bilateral mistake

Both parties are mistaken about the same material fact.

Possibility of Contract Rescission or Reformation

• The contract can be rescinded by either party.

• Alternatively, the court may reform the agreement.

Mistakes of Value

If a mistake concerns the future market value or quality of the object of the contract, the mistake is one of value, and the contract normally is enforceable.

• When parties form a contract, their agreement establishes the value of the object of their transaction.

• Each party is considered to have assumed the risk that the value will change in the future or prove to be different from what they thought.

• Without this rule, almost any party who did not receive what they considered a fair bargain could argue mistake.

Fraudulent Misrepresentation

When an innocent party enters a contract due to fraudulently, the contract usually can be avoided, because that party has not voluntarily consented to its terms.

• Fraud

• Rescind the contract and be restored to their original position.

• Enforce the contract and seek damages for any harms resulting from the fraud.

What must be done for fraud to be proven?

• A misrepresentation of a material fact must occur.

• There must be an intent to deceive.

• The innocent party must justifiably rely on the misrepresentation.

• To collect damages, the innocent party must have been harmed as a result of the misrepresentation.

Misrepresentation of a material fact can occur by either:

• Words

  • Example: “This sculpture was created by Michelangelo” is a misrepresentation of fact if another artist sculpted the statue

• Actions

  • Example: If a customer asks to see only paintings by Edward Hopper and the gallery owner immediately leads the customer to paintings that were not done by Hopper, the owner’s actions may be a misrepresentation.

Misrepresentation by Conduct

Misrepresentation also occurs when a party takes specific action to conceal a fact that is material to the contract.

Statements of Opinion

Statements of opinion and representations of future facts (predictions) generally are not subject to claims of fraud.

Statement of Opinion (Exception)

Naive purchaser relies on an opinion from an expert, the innocent party may be entitled to rescission or reformation.

Misrepresentation of Law…

ordinarily does not entitle a party to relief from a contract.

Misrepresentation of Law (Exception)

Exceptions when the misrepresenting party is in a profession that is known to require greater knowledge of the law than the average citizen possesses.

Misrepresentation by Silence

Ordinarily, neither party to a contract has a duty to come forward and disclose facts; therefore, courts typically do not set aside contracts because a party did not volunteer pertinent information.

Misrepresentation by Silence (Exception)

Seller knows of a serious potential problem that the buyer cannot reasonably be expected to discover, the seller may have a duty to speak.

• Usually, the seller must disclose only latent defects—a defect that is not obvious or cannot readily be ascertained.

Fiduciary Relationship

one of trust, such as physician and patient, attorney and client, or partners—they have a duty to disclose material facts.

• Failure to do so may constitute fraud.

Scienter

Knowledge by the misrepresenting party that material facts have been falsely represented or omitted with an intent to deceive.

Scienter exists if a party:

• Knows that a fact is not as stated

• Makes a statement that they believe is not true

• Makes a statement recklessly, without regard to whether it is true or false

• Says or implies that a statement is made on some basis, such as personal knowledge or personal investigation, when it is not

Innocent Misrepresentation

False statement of fact or an act made in good faith that deceives and causes harm or injury to another.

• The aggrieved party can rescind the contract, but

• Usually cannot seek damages.

Negligent Misrepresentation

words or conduct that amounts to an untrue statement of fact made in circumstances in which a reasonable and prudent person would not have done that which led to the misrepresentation.

A misrepresentation made with an honest belief in its truth may still be negligent due to:

• A lack of reasonable care in uncovering or disclosing facts

• The absence of the skill or competence required by a particular business or profession

What must a deceived party have for replying on misrepresentation?

justifiable reason

Reliance is not justified if the innocent party either:

• Knows the true facts

• Relies on obviously extravagant statements

The same rule (Reliance) applies to defects in property sold:

• If the defects would be obvious on inspection, the buyer cannot justifiably rely on the seller’s representations.

• If the defects are hidden or latent, the buyer is justified in relying on the seller’s statements.

Injury Generally not required for Rescission

Rescission returns the parties to the positions they held before the contract was made, a showing of injury to the innocent party is unnecessary

Proof of harm is required to recover damages caused by fraud:

• The measure of damages is ordinarily equal to the property’s value had it been delivered as represented, less the actual price paid for the property.

• Fraud actions necessarily involve wrongful conduct, punitive damages may be recoverable.

Undue influence

Persuasion that is less than actual force but more than advice and that induces a person to act according to the will or purposes of the dominating party.

A contract entered into under excessive or undue influence lacks voluntary consent and…

is therefore voidable.

One party may have the opportunity to dominate and unfairly influence another party in various types of…

fiduciary relationships

What are the various examples of fiduciary relationships?

• Physician and patient

• Parent and child

• Spouses

• Guardian and ward