Chapter 14: Capacity and Legality

What are the 3rd and 4th requirements for a valid contract?

contractual capacity and legality

contractual capacity =

The legal ability to enter into contracts; the threshold mental capacity required by law for a party who enters into a contract to be bound by that contract.

When may capacity be lacking or questionable?

when a person is very young or mentally incompetent

age of majority =

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

What is the age of majority?

18

In addition, some states provide for the termination of minority on:

marriage

Minority status may also be terminated by a minor’s:

emancipation

emancipation =

In regard to minors, the act of being freed from parental control; occurs when a child’s parent or legal guardian relinquishes the legal right to exercise control over the child. Normally, a minor who leaves home to support himself or herself is considered emancipated.

The general rule is that a minor can enter into any contract that an adult can, except =

contracts prohibited by law for minors

What are some contracts prohibited by law for minors?

contracts to purchase tobacco or alcoholic beverages

To exercise the option to avoid a contract, a minor need only:

manifest (clearly show) an intention not to be bound by it

disaffirmance =

The legal avoidance, or setting aside, of a contractual obligation.

What must a minor do to disaffirm?

must express his or her intent, through words or conduct, not to be bound to the contract

The minor must disaffirm the:

entire contract, not merely a portion of it

Liability waivers are generally enforceable contracts, but a minor can:

avoid a contract by disaffirming it

Why do companies prefer to resolve disputes through arbitration rather than going to trial?

Typically, arbitration is less costly than taking a case to trial.

Why are the initials S.L. used here?

Because the former employee in question here was a minor when she was injured on the job. That is also why her mother filed the lawsuit on her behalf.

What is the issue in this case involving a minor? (minor injured at job at PAK foods)

Did S.L. disaffirm the agreement to arbitrate?

What is the rule of law in this disaffirmance case?

At the moment that the minor, S.L., filed suit against her former employee to recover medical expenses from an on-the-job injury, that act in and of itself served as a disaffirmance of any agreement to arbitrate.

A contract can ordinarily be disaffirmed at any time during minority or for a:

reasonable period after the minor reaches the age of majority

A Minors 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 _____ on the minor to restore the adult party to the position she or he held before the contract was made.

duty of restitution

What does duty of restitution mean?

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

What are examples of some contracts that cannot be avoided?

marriage contracts and contracts to enlist in the armed services

In addition, a growing number of states have enacted laws that prohibit minors who misrepresented their age when entering into a contract from later:

disaffirming it

Finally, a minor who enters into a contract for necessaries may disaffirm the contract but remains liable for:

the reasonable value of the goods

Necessaries =

Necessities required for life, such as food, shelter, clothing, and medical attention; may include whatever is believed to be necessary to maintain a person’s standard of living or financial and social status.

Contracts for necessaries are enforceable only to the level of value needed to:

maintain the minor’s standard of living

ratification =

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

Express ratification =

takes place when the individual, on reaching the age of majority, states orally or in writing that he or she intends 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

After a minor fails to disaffirm a contract within a reasonable time after reaching the age of majority, courts presume that executed contracts (fully performed contracts) are:

ratified

After a minor fails to disaffirm a contract within a reasonable time after reaching the age of majority, courts presume that executory contracts (contracts not yet fully performed by both parties) are:

disaffirmed

As a 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

As a consequence, businesses ordinarily require parents to:

cosign any contract made with a minor

Contracts by minors: The General Rule

Contracts entered into by minors are voidable at the option of the minor.

Contracts by minors: Rules of Disaffirmance

A minor may disaffirm the contract at any time while still a minor and within a reasonable time after reaching the age of majority.

• Most states do not require restitution.

Contracts by minors: Exceptions to Basic Rules of Disaffirmance — Misrepresentation of age (or fraud)

In many jurisdictions, statutes prohibit minors who misrepresent their age from disaffirmance.

Contracts by minors: Exceptions to Basic Rules of Disaffirmance — Necessaries

Minors remain liable for the reasonable value of necessaries.

Contracts by minors: Exceptions to Basic Rules of Disaffirmance — Ratification

After reaching the age of majority, a person can ratify a contract that he or she formed as a minor, thereby becoming fully liable for it.

Intoxication =

a condition in which a person’s normal capacity to act or think is inhibited by alcohol or some other drug

A contract entered into by an intoxicated person can be either:

voidable or valid

If the person was sufficiently intoxicated to lack mental capacity:

then the agreement may be voidable even if the intoxication was purely voluntary

If, despite intoxication, the person understood the legal consequences of the agreement:

the contract will be enforceable

Why do courts rarely permit contracts to be avoided due to intoxication?

because it is difficult to prove that a person’s judgment was so severely impaired that he or she could not comprehend the legal consequences of entering into a contract

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

Contracts for necessaries are voidable, but the intoxicated person is:

liable in quasi contract for the reasonable value of the consideration received

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

What are acts or conduct inconsistent with an intent to disaffirm?

the continued use of property purchased under a voidable contract—will also normally ratify the contract

Contracts by Intoxicated Persons: The General Rules

• If a person was sufficiently intoxicated to lack the mental capacity to comprehend the legal consequences of entering into the contract, the contract may be voidable at the option of the intoxicated person.

• If, despite intoxication, the person understood these legal consequences, the contract will be enforceable.

Contracts by Intoxicated Persons: Rules of Disaffirmance

• An intoxicated person may disaffirm the contract at any time while intoxicated and for a reasonable time after becoming sober but must make full restitution.

• Contracts for necessaries are voidable, but the intoxicated person is liable for the reasonable value of the goods or services.

Contracts by Intoxicated Persons: Ratification

After becoming sober, a person can ratify a contract that she or he formed while intoxicated, thereby becoming fully liable for it.

Contracts made by mentally incompetent persons can be:

void, voidable, or valid

If a court has previously determined that a person is mentally incompetent, any contract made by that person is:

void

On determining that someone is mentally incompetent, the court appoints:

a guardian to represent the individual

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 if:

the person did not know that he or she was entering into the contract or lacked the mental capacity to comprehend its nature, purpose, and consequences

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

Some people who are incompetent due to age or illness have lucid intervals:

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

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

Contracts by Mentally Incompetent Persons: When the Contract Will Be Void

If a court has declared a person to be mentally incompetent and has appointed a legal guardian, any contract made by that person is void from the outset.

Contracts by Mentally Incompetent Persons: When the Contract Will Be Voidable

If a court has not declared a person mentally incompetent, but that person lacked the capacity to comprehend the subject matter, nature, and consequences of the agreement, then the contract is voidable at that person’s option.

Contracts by Mentally Incompetent Persons: When the Contract Will Be Valid

If a court has not declared a person mentally incompetent and that person was able to understand the nature and effect of the contract at the time it was formed, then the contract is enforceable.

For a contract to be valid and enforceable, it must be formed for a _____ purpose.

legal

Any contract to commit a crime is in violation of:

a statute

Examples of contracts to commit a crime:

• a contract to sell illegal drugs in violation of criminal laws

• a contract to hide a corporation’s violation of securities laws or environmental regulations

Sometimes, the object or performance of a contract is rendered illegal by a statute after:

the parties entered into the contract

When is a contract is considered to be discharged (terminated) by law?

if the object or performance of a contract is rendered illegal by a statute after the parties entered into the contract

Almost every state has a statute that sets the maximum rate of:

interest that can be charged for different types of transactions, including ordinary loans

usury =

Charging an illegal rate of interest

A lender who makes a loan at an interest rate above the lawful maximum commits:

usury

In addition, states can make exceptions to facilitate business transactions. For instance:

• many states exempt corporate loans from the usury laws

• nearly all states allow higher-interest-rate loans for borrowers who could not otherwise obtain loans

Gambling =

the creation of risk for the purpose of assuming it

What is gambling?

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

Today, many states allow (and regulate) certain forms of:

gambling

What forms of gambling are allowed?

horse racing, video poker machines, and charity-sponsored bingo & nearly all states allow state-operated lotteries, as well as gambling on Native American reservations

Even in states that permit certain types of gambling, though, courts often find that gambling contracts:

are illegal

Members of what certain professions need to have licenses?

physicians, lawyers, real estate brokers, accountants, architects, electricians, and stockbrokers

If the statute’s purpose is to protect the public from unauthorized practitioners (such as unlicensed attorneys and electricians), then a contract involving an unlicensed practitioner is generally:

illegal and unenforceable

If the statute’s purpose is merely to raise government revenues, however, a court may enforce (contract with an unlicensed person):

the contract and fine the unlicensed person

What are contracts contrary to public policy?

contracts that involve private parties, but are not enforceable because of the negative impact they would have on society

What are examples of contracts contrary to public policy?

• contract to commit an immoral act, such as selling a child, and a contract that prohibits marriage

• Business contracts that may be against public policy include contracts in restraint of trade and unconscionable contracts or clauses

What are contracts in restraint of trade?

anticompetitive agreements

Why are contracts in restraint of trade generally unenforceable?

The United States has a strong public policy favoring competition in the economy & they are contrary to public policy

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

An exception is recognized for contracts in restraint of trade when:

the restraint is reasonable and is 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 and for 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. Although covenants not to compete restrain trade, they are commonly found in partnership agreements, business sale agreements, and employment contracts. If they are ancillary to such agreements, covenants not to compete will normally be enforced by the courts unless the time period or geographic area is deemed unreasonable.

restrictive covenant (promise) =

covenant not to compete

A covenant not to compete may be created when:

a merchant who sells a store agrees not to open a new store in a certain geographic area surrounding the old business

When is a restrictive covenant enforceable?

when it is reasonable and is an ancillary part of the sale of an ongoing business

agreements not to compete are also known as:

noncompete agreements

Sometimes, agreements not to compete are included in:

employment contracts

People in middle- or upper-level management positions commonly agree not to:

work for competitors or not to start competing businesses for a specified period of time after termination of employment

Noncompete agreements are legal in most states so long as:

the specified period of time (of restraint) is not excessive in duration and the geographic restriction is reasonable.

A restraint that is found to be overly broad will:

not be enforced

What state prohibits the enforcement of covenants not to compete altogether?

California

In some states, including Texas, such a covenant will not be enforced unless:

the employee has received some benefit in return for signing the noncompete agreement

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

reform

If a covenant is found to be unreasonable in time or geographic area, the court may convert the terms into reasonable ones and then enforce the reformed covenant. Such court actions present a problem, though, in that:

the judge implicitly becomes a party to the contract

Consequently, courts usually resort to contract ____ only when necessary to prevent undue burdens or hardships.

reformation

reformation =

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

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 contract or clause