L201 Exam 4 (ALSO USE EXAM 3 SET)

Contractual Capacity

the legal ability to enter into a contractual relationship

Historical Capacity

Law as given special protection to those with the inexperience of youth or lacking competence

Minors in Contracts

-under the age of 18 (with exceptions)
-may enter into any legal contract, but always have the option to disaffirm
-contracts are voidable at option of minor (with exceptions)

Exceptions to Minority Status

-emancipation
-marriage

Age of Majority

The age at which an individual is considered legally capable of conducting himself or herself responsibly. A person of this age is entitled to the full rights of citizenship, including the right to vote. In contract law, the age at which one is no longer an infant and can no longer disaffirm a contract.

Emancipation

child's legal guardian relinquishes the legal right to exercise control over the child
-normally minors who leave home to support themselves are considered emancipated
-several jurisdictions permit minors themselves to petition the court for emancipation

Disaffirmance

The legal avoidance, or setting aside, of a contractual obligation.
-may disaffirm at any time during minority or for a reasonable time after minor reaches age of majority
-minor must manifest (clearly show) an intention not to be bound by the contract through words or conduct
-minor must disaffirm the contract in its entirety
-adult entering into a contract with a minor cannot avoid duties unless the minor disaffirms them
-minors normally can recover any property they transferred to the adult even if the property is in possession of a 3rd party

PAK Foods Houston, LLC v. Garcia

A minor worked for KFC operated by PAK Foods Houston, LLC. PAK Foods' policy was to resolve any dispute with an employee through arbitration. Minor signed an acknowledgment of this policy. S.L. was injured on the job and terminated her employment. She filed a suit against PAK to recover medical expenses for the injury. PAK filed a motion to compel arbitration

Decision: court denied. PAK appealed and lost again because S.L. had the right to disaffirm the agreement since she was a minor

State Differences on Minor Obligation in Disaffirmance

most states hold that minors need only return goods (or other consideration), provided goods are in minors possession or control (even if damaged)
-growing # of states (NEW LAW, minority of states) place an additional duty of restitution on the minor to restore the adult party to the position they held before the contract (including damage, wear & tear, depreciation)

Necessaries

basic needs (food, clothing, shelter, and medical services)
-minor who enters into contract for necessaries may disaffirm but remains liable for reasonable value of goods
-includes student loans, education, military enlistment

Ratification

The act of accepting and giving legal force to an obligation that previously was not enforceable.
-minor who reaches age of maturity can ratify a contract expressly or impliedly
-executed contracts ratified, executory disaffirmed at age of majority

Express Ratification

orally or in writing

Implied Ratification

indicate intent to abide

Parent Liabilities

in general, parents are not liable for contract made by minors on their own, except necessaries contracts (parents legally required to provide necessaries)
-businesses typically require parents to cosign, then they are liable

Intoxication

contact entered into by intoxicated person may be either voidable or valid
-if person sufficiently intoxicated to lack mental capacity, agreement may be voidable even if the intoxication was completely voluntary
-if the party understood legal consequences while intoxicated, contract is enforceable

Intoxication and Disaffirmance

person has option of disaffirming while intoxicated and for a reasonable time once sober (if contract is voidable)
-must return all consideration except necessaries
-liable in quasi-contract for the reasonable value of the consideration received

Intoxication and Ratification

may ratify expressly or impliedly once sober

Metal Incompetence

contracts may be void, voidable, or valid

Void due to mental incompetence

-if a court has previously determined person incompetent
-court appoints guardian
-only guardian can enter into contracts on person's behalf

Voidable due to mental incompetence

-court not determined incompetent previously, but person incompetent at time of contract
-voidable if person did not know they were entering into a contract or lacked mental capacity to comprehend nature, purpose, and consequences

Valid due to mental incompetence

-contract entered into by a mentally ill person (not previously declared incompetent) valid if person had capacity at time contract was formed
-some people have lucid intervals, contracts entered into during these periods are valid

Contracts contrary to statute

contracts to commit a crime, usury, gambling, licensing statutes

Contracts to commit a crime

if object of contact rendered illegal by a statute after parties enter into contract, contract is terminated by law

Usury

the practice of lending money at exorbitant rates

Gambling

courts often find gambling contracts illegal

Licensing Statutes

All states have statutes that require licenses to be obtained in order to engage in certain trades, professions, or business
-contract with unlicensed practitioners typically illegal and unenforceable
-if statutes purpose is only to raise government revenues, court may enforce contract with unlicensed person (would fine the unlicensed person)

Contracts Contrary to Public Policy

-contracts having negative impact on society
-contracts in restraint of trade

Contracts having negative impact on society

a contract that has a negative impact on society or that interferes with the public's safety and welfare
-ex: contract to commit an immoral act, contract to prohibit marriage
-biz ex: contracts in restraint of trade, unconscionable contracts or clauses

Contracts in restraint of trade

anticompetitive agreements, generally unenforceable
-typically violate antitrust statutes
-exception when restraint is reasonable, constrained in ancillary (secondary or subordinate) clause in a contract (often in employment and sale of an ongoing business)

Covenant not to compete

(restrictive covenent) promise to refrain from competing with another party for certain period of time and in certain geographic area
-enforceable if reasonable and ancillary part of an ongoing business
-in employment contracts, legal so long as period of time specified, geographic restriction reasonable, it is enforceable
-enforcement issues: vary by state, courts usually only resort to reformation when necessary to prevent undue burden or hardships

Kennedy v. Shave Barber Co.

-Kennedy signed agreement to not work in men's grooming industry in 3-mi radius of Shave Co. for 2 years
-Kennedy opens salon 2 miles from Shave Co. months after quitting
-shave sues alleging breach of noncompete provision
-upper court affirms lower courts decision in favor of shave co

Unconscionable Contracts or Clauses

-procedural
-substantive

Procedural unconscionability

inconspicuous print, unintelligible language, disparity in bargaining power, includes some adhesion contracts

Substantive unconscionability

oppressive or grossly unfair contractual terms

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.
-courts sometimes refuse to enforce due to unconscionability
-frequently held contrary to public policy
-courts do enforce if reasonable, do not violate public policy, do not protect parties from liability for intentional misconduct
-language must not be ambiguous, parties must be in relatively equal bargaining positions

Blanket liability waiver

typically unenforceable

Holmes v. Multimedia KSDK

Exculpatory clauses, Contracts contrary to public policy
-Holmes signed release, sued saying was ambiguous
-court ruled in favor of inc, release unambiguous

Discriminatory Contracts

violate statute and public policy
-unenforceable

Contracts contrary to statute (list)

-usurious loans
-gambling contracts
-contracts to commit a crime
-contracts by unlicensed persons

Contracts Contrary to Public Policy (list)

-contracts in restraint of trade
-contracts to commit a tort
-unconscionable contracts
-adhesion contracts
-exculpatory clauses
-discriminatory contracts

Effect of Illegality

-in most illegal contracts, both parties considered at fault (in pari delicto)
-if executory, neither party can enforce
-if executed, neither party can recover damages

justifiable ignorance of the facts

If one party has no reason to know that the contract is illegal, he or she is relatively innocent.
-may recover benefits conferred in partially executed contract
-courts will not enforce, will allow parties to return to previous positions

Withdrawal from illegal agreement

if illegal part not yet performed, party rendering performance can withdraw and recover

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.

Ilegal Contracts

includes fraud, duress, and undue influence

Severable Contracts and Illegality

may enforce legal part and not illegal part

Valencia v White

A minor who disaffirms a contract may be held liable for benefits received even though the benefits are not necessaries and even though the benefits cannot be returned in kind.
-ultimate decision restored both parties to prior standing

Voluntary Consent

-an otherwise valid contract may still be unenforceable if the parties have not genuinely agreed to its terms
-lack of vol. consent can be used as a defense to enforcement
-may lack due to mistake, misrepresentation, undue influence, duress
-party who demonstrates they did not agree may either carry out contract or rescind

Mistakes

-only a mistake of fact makes a contract voidable
-occur in bilateral and unilateral forms

Bilateral Mistake

both parties mistaken; contract can be rescinded by either party
-when parties interpret a term differently, court may rescind because no "meeting of the minds"

Unilateral Mistake

A mistake that occurs when one party to a contract is mistaken as to a material fact.
-in general, contract is enforceable
-2 exceptions

Exceptions to Unilateral Mistake Enforceability

1. the other party to the contract knows or should have known that a mistake of fact was made
2. the error was due to a substantial math error and was made inadvertently and without extreme negligence

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.
-value is variable, each party is considered to have assumed the risk that value would change in the future

Fraudulent Misrepresentation

-is a tort, but also impacts authenticity of the innocent party's consent
-when innocent party fraudulently induced to enter into contract, contract usually can be avoided because no voluntary consent
-innocent party can rescind and be restored OR enforce and seek damages for any harms resulting from fraud

Fraudulent Misrepresentation Elements

1. A misrepresentation of a material fact must occur
2. There must be an intent to deceive
3. The innocent party must justifiably rely on the misrepresentation
4. To collect damages, a party must have been harmed as a result of the misrepresentation

merger clause (entire agreement clause)

A clause in a written agreement within the statute of frauds which states that the written agreement accurately reflects the final, complete version of the agreement.
-AKA no separate agreements will be considered

McCullough v. Allstate Property and Casualty Insurance Co.

-Allstate issued policy to McCullough insuring his truck
-McC loaned truck to someone who returned it damaged, he filed claim
-Allstate treated claim as multiple claims, McC sued saying damage was from one claim only
-Allstate agreed to settle for $8,000 and correcting report to reflect that McC made one claim and Allstate paid nothing on the claim
-Allstate lawyer sent email agreeing, but promise was not included in release and settlement agreement (had a merger clause)
-Later, McC learns that Allstate had reported it had paid 8,000 to him on claim, he sues
-upper court concluded issue of material fact surrounding potential fraud, remanded the case

Misrepresentation by Conduct

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

Statements of Opinion and Predictions

generally are not subject to claims of fraud
-exception: naive purchaser relies on expert opinion, innocent party may be entitled to recission or reormation

Misrepresentation of Law

This will usually not excuse the innocent party, unless the speaker is a member of a profession that requires greater knowledge of the law than possessed by the average citizen.

Misrepresentation by Silence

ordinarily neither party has duty to disclose facts, however, seller will be liable if she knows of material defect that cannot be reasonably discovered by the buyer
-seller must disclose latent defects
-when parties are in a fiduciary relationship they have a duty to disclose material facts, failure to do so may be fraud

latent defects

A defect that is not obvious or cannot readily be ascertained.

Scienter

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

Innocent Misrepresentation

A false statement of fact or an act made in good faith that deceives and causes harm or injury to another.
-aggrieved party can rescind contract, typically cannot seek damages

Negligent Misrepresentation

misrepresentation made without due care in ascertaining its truthfulness; renders agreement voidable
-in most states it is equal to scienter

Receiver (Trustee)

an independent, impartial party appointed by a bankruptcy court to manage property and dispose of it in an orderly manner for the benefit of creditors

Cronkleton v. Guaranteed Construction

-real estate transaction from foreclosed carwash
-following his purchase of the carwash, Cronk asserted fraud
-construction promised to winterize equipment in email
-issue w/ winterizing, Cronk not notified
-jury found Cronk had reasonably relied on assumptions
-upper court affirms trial in favor of Cronk

Injury to the innocent party

-most courts do not require showing of injury
-proof of harm is universally required
-because fraud actions necessarily involve wrongful conduct, courts may sometimes award punitive damages

Fazio v. Cypress/GR Houston I, LP

-Fazio not entitled to damages because fraud had not negatively affected the property's value at the time it was purchased

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.
-overcoming party's free will
-lacks voluntary consent; voidable
-minors and the elderly often under influence of guardians

Undue Influence Sources

can be commonly found in fiduciary relationships

Duress

the use of threats to force a party to enter into a contract
-use of blackmail or extortion
-both defense to enforcement and grounds for recission

Establishing Duress

-must be proof of a threat to do something the threatening party has no right to do
-threatened act must be wrongful or illegal
-must interfere with free will
-a threat to exercise a legal right (ex: sue) typically does not constitute duress
-ECONOMIC NEED: generally not sufficient to constitute duress, even when one party exacts a very high price... if party extracting the price also creates the need, however, economic duress may be found

Adhesion Contracts

standard form contracts prepared by one party and presented to the other on a "take it or leave it" basis
-often no opportunity to negotiate terms

Standard Form Contracts

often contain fine-print provisions that shift a risk ordinarily borne by one party to the other
-biz: insurance policies, residential leases, loan agreements, employment agency contracts
-to avoid enforcement, plaintiff must normally show contract or clause is unconscionable

Forum-Selection Clause

A provision in a contract designating the court, jurisdiction, or tribunal that will decide any disputes arising under the contract.

Adjudication

when a court determines someone is mentally incompetent

The Statute of Frauds

state statute under which certain types of contracts must be in writing to be enforceable
-roots in 1677 English parliament "An Act for the Prevention of Frauds and Perjuries", est. that certain contracts must be written to ensure reliable evidence
-statutes vary by state
-NOT RELATED TO FRAUD
-an oral contract that should've been written is normally voidable by the party who later does not with wo enforce

Contracts that must be in writing

1. contracts involving interests in land
2. contracts that cannot by their terms be performed within one year from the day after the date of formation
3. collateral (secondary) contracts, such as promises to answer for the debt of another and promises by the executor of an estate to pay a debt of the estate personally
4. promises made in the consideration of marriage
5. under UCC, contracts for sale of goods priced at $500 or more

Contracts involving interests in land

a contract for the sale of land is not enforceable unless it is in writing
-land is real property and includes all physical objects that are permanently attached to the soil
-statute of frauds operates as a defense to enforcement of an oral contract for sale of land
-written req for transfer of interests in land (mortgage, lease), option to purchase
-generally, contract must describe property with sufficient certainty to be identified

The One-Year rule

A rule that states that an executory contract that cannot be performed by its own terms within one year of its formation must be in writing.
-if possible within 1 year, it does not fall under the statute of frauds

Collateral Promise

A secondary promise that is ancillary (subsidiary) to a principal transaction or primary contractual relationship, -a promise made by one person to pay the debts of another if the latter fails to perform.
-must be in writing to be enforceable.

Primary Obligation

A promise to pay another person's debt that is not conditioned on the person's failure to pay (or perform)
-normally does not need to be in writing

Secondary obligation

A promise to pay another's debt only if that party fails to pay
-needs to be in writing

Exception to Collateral Promise- the "main purpose" rule

Oral promise to answer for the debt of another is covered under the statute of frauds UNLESS the guarantor's main purpose in incurring a secondary obligation is to secure a personal benefit
-then the contract has no writing requirement

Promises made in the consideration of marriage

A unilateral promise to make a monetary payment or to give property in consideration of a promise to marry must be in writing.

prenuptial agreement

An agreement made before marriage that defines each partner's ownership rights in the other partner's property.
-Prenuptial agreements must be in writing to be enforceable.

Contracts for the sale of goods

UCC requires a writing or memorandum for the sale of goods priced at $500 or more.
-need only state quantity
-other agreed on terms may be omitted or stated precisely as long as they reflect both parties intentions

Exceptions to the Writing Requirement

partial performance, admissions, promissory estoppel

Partial performance

When the contract has been partially performed, a court may grant SPECIFIC PERFORMANCE, an equitable remedy that requires the performance of the contract according to its precise terms
-may sometimes be granted for oral contracts
-in cases of oral contracts for sale of land, courts look at whether justice is better served by enforcing oral contract when partial performance has taken place
-in some states, mere reliance on certain types of oral contracts is enough to remove from statute of frauds
-UCC provides oral contract for sale of goods is enforceable to extent that a seller accepts payment or buyer accepts the delivery of goods
-in general, at least one party believes there is a contract

Admissions

If a party against whom enforcement of an oral contract is sought "admits" under oath that a contract for sale was made, the contract will be enforceable
-admission can occur at any stage of court proceedings
-if party admits contract in UCC, contract is enforceable only to extent of quantity admitted

Promissory Estoppel

If a person justifiably relies on another's promise to his or her detriment, a court may estop (prevent) the promisor from denying that a contract exists.
-oral promise can be enforceable
-must be no way to avoid injustice except to enforce the promise

Special exceptions under the UCC

Oral contracts for customized goods may be enforced in certain circumstances.
-oral contracts between merchants that have been confirmed in written memorandum

Sufficiency of the writing

written contract, a written memorandum, or an electronic record that evidences the agreement and is signed by the party against whom enforcement is sought
-signature may be anywhere in writing, can consist of typed name or just initials
-several documents may form a single contract if physically attached or placed in the same envelope
-memorandum or note evidencing oral contract need only contain essential terms, must indicate voluntary agreement, must state quantity and be signed under UCC
-writing must name parties, identify subject matter with certainty, consideration, and essential terms
-sale of property must include price and sufficient clarity of description

Enforceability of written contracts

Because only the party against whom enforcement is sought must sign, a contract may be enforceable by one party and not another

Moore v. Bearkat Energy Partners, LLC

-Lane hires Bear to buy mineral leases in TX
-provided funding for Bear's purchases, when leases sold Bear received % of profit
-w/o telling Lane, Bear hired Moore, Bear and Moore sign an agreement providing Moore would be compensated. Lane did not sign
-Moore files against Bear for compensation
-upper court affirmed lower court finding agreement was too vague to be enforceable.

Parol Evidence Rule

A substantive rule of contracts under which a court will not receive into evidence the parties' prior negotiations, prior agreements, or contemporaneous oral agreements if that evidence contradicts or varies the terms of the parties' written contract.
-cannot present
1. negotiations prior to contract formation
2. agreements prior to contract formation
3. oral agreements contemporaneous (existing or occurring in the same period of time) with contract formation

Exceptions to the Parol Evidence Rule

-Contracts subsequently modified.
oral may not be enforceable, especially if original contract provides that any modifications must be in writing
-Voidable or void contracts.
oral evidence may be introduced in all cases to show contract voidable or void
-Contracts containing ambiguous terms.
-Incomplete contracts
courts allow additional evidence to "fill the gaps"
-Prior dealing, course of performance, usage of trade.
-Contracts subject to orally agreed-on conditions precedent.
condition precedent: parties agree a condition must be fulfilled before a party is required to perform the contract
-Contracts with an obvious or gross clerical error

Frewil, LLC v. Price

-Price and Smith contracted Frewil in renting an apartment
-were told by Frewil it included a washer/dryer and dishwasher included, contract did not expressly state they existed
-price and smith tried to move in, found no appliances, and therefore found other housing
-Frewil filed suit for breach of contract
-upper court found Price's parol evidence admissable

Integrated Contract

a writing that the parties intend as the final, complete expression of their agreement
-extraneous evidence not admissible
complete: contains all terms of the agreement
partial: contains some of terms of agreement
-parol evidence only allowed to add to terms of partially integrated contract