© 2005 west legal studies in business a division of thomson learning chapter 8 capacity, legality,...

© 2005 West Legal Studies in Business

A Division of Thomson Learning

CHAPTER 8CHAPTER 8

Capacity, Capacity, Legality, Assent, Legality, Assent, and Formand Form

2© 2005 West Legal Studies in Business


• What are some exceptions to the rule that a What are some exceptions to the rule that a minor can disaffirm (avoid) any contract? minor can disaffirm (avoid) any contract?

• Does an intoxicated person have the capacity Does an intoxicated person have the capacity to enter into an enforceable contract? to enter into an enforceable contract?

• In what types of situations might genuineness In what types of situations might genuineness of assent to a contract’s terms be lacking?of assent to a contract’s terms be lacking?

• What elements must exist for fraudulent What elements must exist for fraudulent misrepresentation to occur?misrepresentation to occur?

• What contracts must be in writing to be What contracts must be in writing to be enforceable?enforceable?

Learning ObjectivesLearning Objectives



Contractual CapacityContractual Capacity

• Contractual Capacity.Contractual Capacity.– The legal ability to enter into a The legal ability to enter into a

contractual relationship.contractual relationship.• Full competence.Full competence.• No competence.No competence.• Limited competence.Limited competence.

• Legality.Legality.– The agreement must not call for the The agreement must not call for the

performance of any act that is criminal, performance of any act that is criminal, tortious, or otherwise opposed to tortious, or otherwise opposed to public policy.public policy.



MinorsMinors

• In most states, a person is no longer In most states, a person is no longer a minor for contractual purposes at a minor for contractual purposes at the age 18.the age 18.

• A minor can enter into any contract A minor can enter into any contract that an adult can.that an adult can.

• A contract entered into by a minor is A contract entered into by a minor is voidable at the option of that minor.voidable at the option of that minor.



Minor’s Right to DisaffirmMinor’s Right to Disaffirm

• A contract can be disaffirmed at any A contract can be disaffirmed at any time during minority or for a time during minority or for a reasonable period after the minor reasonable period after the minor comes of age.comes of age.

• Minor must disaffirm the entire Minor must disaffirm the entire contract.contract.

• Disaffirmance can be expressed or Disaffirmance can be expressed or implied.implied.



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

• In increasing number of states, the In increasing number of states, the minor must restore the adult to the minor must restore the adult to the position held before the contract was position held before the contract was made.made.

Minor’s Obligation on Minor’s Obligation on DisaffirmanceDisaffirmance



Exceptions to Minor’s Exceptions to Minor’s Right to DisaffirmRight to Disaffirm

• Misrepresentation of Age.Misrepresentation of Age.– Generally, minor can disaffirm the contract.Generally, minor can disaffirm the contract.– But some states prohibit disaffirmance and But some states prohibit disaffirmance and

hold the minor liable.hold the minor liable.• Contracts for Necessaries.Contracts for Necessaries.

– Contracts for food, clothing, shelter may be Contracts for food, clothing, shelter may be disaffirmed by minor, who remains liable for disaffirmed by minor, who remains liable for the reasonable value of goods or services.the reasonable value of goods or services.

– Yale Diagnostic Radiology v. Estate of HarunYale Diagnostic Radiology v. Estate of Harun (2004).(2004).



Exceptions to Minor’s Exceptions to Minor’s Right to DisaffirmRight to Disaffirm

• Insurance.Insurance.– Not viewed as necessaries, so minor Not viewed as necessaries, so minor

can disaffirm contract and recover all can disaffirm contract and recover all premiums paid.premiums paid.

• Loans.Loans.– Seldom considered to be necessaries.Seldom considered to be necessaries.– Exception:Exception:

• Loan to a minor for the express purpose of Loan to a minor for the express purpose of enabling the minor to purchase necessaries.enabling the minor to purchase necessaries.



RatificationRatification

• Occurs when a minor, on or after Occurs when a minor, on or after reaching majority, indicates reaching majority, indicates (expressly or impliedly) an intention (expressly or impliedly) an intention to become bound by a contract made to become bound by a contract made as a minor.as a minor.

• Executed v. Executory contracts.Executed v. Executory contracts.



• Contracts.Contracts.– Parents not liable (This is why parents are Parents not liable (This is why parents are

usually required to sign any contract made usually required to sign any contract made with a minor).with a minor).

• Torts (Statutes Vary):Torts (Statutes Vary):– Minors are personally liable for their own Minors are personally liable for their own

torts.torts.– Liability imposed on parents only for willful Liability imposed on parents only for willful

acts of their minor children.acts of their minor children.– Liability imposed on parents for their children Liability imposed on parents for their children

negligent acts that result from their parents’ negligent acts that result from their parents’ negligence.negligence.

Parent’s LiabilityParent’s Liability



Intoxicated PersonsIntoxicated Persons

• Lack of contractual capacity at the Lack of contractual capacity at the time the contract is being made.time the contract is being made.

• Contract can be either voidable or Contract can be either voidable or valid.valid.– Courts look at objective indications to Courts look at objective indications to

determine if contract is voidable.determine if contract is voidable.

• If voidable:If voidable:– Person has the option to disaffirm, orPerson has the option to disaffirm, or– Person may ratify the contract Person may ratify the contract

expressly or impliedly.expressly or impliedly.



Mentally Incompetent Mentally Incompetent PersonsPersons

• Void.Void.– If a person has been adjudged mentally If a person has been adjudged mentally

incompetent by a court of law and a guardian has incompetent by a court of law and a guardian has been appointed.been appointed.

• Voidable.Voidable.– If the person does not know he or she is entering If the person does not know he or she is entering

into the contract or lacks the mental capacity to into the contract or lacks the mental capacity to comprehend its nature, purpose, and comprehend its nature, purpose, and consequences. consequences.

• Valid.Valid.– If person is able to understand the nature and If person is able to understand the nature and

effect of entering into a contract yet lacks effect of entering into a contract yet lacks capacity to engage in other activities.capacity to engage in other activities.

– Lucid Interval.Lucid Interval.



LegalityLegality

• A contract to do something A contract to do something prohibited by federal or state prohibited by federal or state statutory law is illegal and therefore statutory law is illegal and therefore void (never existed).void (never existed).– Contract that calls for for a tortious act.Contract that calls for for a tortious act.– Contract that calls for an act contrary to Contract that calls for an act contrary to

public policy. public policy.



Contracts Contrary to Contracts Contrary to StatuteStatute• Usury.Usury.• Gambling.Gambling.• Sabbath Laws.Sabbath Laws.• Licensing Statutes.Licensing Statutes.• Contracts to Commit a Crime.Contracts to Commit a Crime.



Contracts Contrary Contracts Contrary to Public Policyto Public Policy

• Contracts contrary to public policy are Contracts contrary to public policy are void.void.

• Unconscionable Contracts or Clauses.Unconscionable Contracts or Clauses.• Procedural or Substantive Procedural or Substantive

Unconscionability.Unconscionability.• Exculpatory Clauses.Exculpatory Clauses.• Discriminatory Contracts.Discriminatory Contracts.• Contracts for the Commission of a Tort.Contracts for the Commission of a Tort.



Contracts Contrary Contracts Contrary to Public Policyto Public Policy

• Contracts in Restraint of TradeContracts in Restraint of Trade– Anti-Competitive Agreements are void.Anti-Competitive Agreements are void.

• Exception: Covenant not to Compete and Sale Exception: Covenant not to Compete and Sale of Business.of Business.

• Exception: Covenant not to Compete in Exception: Covenant not to Compete in Employment.Employment.

• Unconscionable Contracts/Clauses.Unconscionable Contracts/Clauses.– Exculpatory clauses.Exculpatory clauses.– Beaver v. Grand Prix Karting Association, Beaver v. Grand Prix Karting Association,

Inc.Inc. (2001). (2001).



Illegality: ExceptionsIllegality: Exceptions

• Justifiable Ignorance of the Facts.Justifiable Ignorance of the Facts.• Members of Protected Classes.Members of Protected Classes.• Withdrawal from an Illegal Withdrawal from an Illegal

Agreement.Agreement.• Contract Illegal through Fraud, Contract Illegal through Fraud,

Duress, or Undue Influence.Duress, or Undue Influence.• Severable or Divisible Contracts.Severable or Divisible Contracts.



MistakeMistake

• Mistake of Value (or Quality).Mistake of Value (or Quality).– Contract is enforceable.Contract is enforceable.

• Mistake of Fact.Mistake of Fact.– UnilateralUnilateral Mistake of Material Fact— Mistake of Material Fact—

mistaken party does not have the mistaken party does not have the right to cancel contract right to cancel contract unless:unless:•(1) the non-mistaken party knew or (1) the non-mistaken party knew or

should have known about the mistake, should have known about the mistake, oror

•(2) there is a clerical error.(2) there is a clerical error.



MistakeMistake

• BilateralBilateral Mistakes—if both are Mistakes—if both are mistaken either one can cancel mistaken either one can cancel the contract.the contract.– Roberts v. Century Contractors, Roberts v. Century Contractors,

Inc.Inc. (2004). (2004).



Fraudulent Fraudulent MisrepresentationMisrepresentation

• Innocent party can cancel the contract.Innocent party can cancel the contract.• Plaintiff must show:Plaintiff must show:

– Misrepresentation of a Misrepresentation of a material fact material fact (not (not opinion) by conduct, silence or words.opinion) by conduct, silence or words.

– Intent to deceive.Intent to deceive.•Sarvis v. Vermont State CollegesSarvis v. Vermont State Colleges (2001). (2001).

– Innocent party must justifiably rely on the Innocent party must justifiably rely on the misrepresentation.misrepresentation.

– Plaintiff must have suffered a legal injury.Plaintiff must have suffered a legal injury.



Undue Influence & Undue Influence & DuressDuress• Undue Influence.Undue Influence.

– Arises from a special relationship of trust.Arises from a special relationship of trust.– A stronger party overcomes a weaker A stronger party overcomes a weaker

party’s free will by exerting psychological party’s free will by exerting psychological influence.influence.

• Duress.Duress.– Threat of physical force or extortion.Threat of physical force or extortion.– Can serve as basis for rescission of Can serve as basis for rescission of

contract.contract.– Economic need, by itself, is not duress.Economic need, by itself, is not duress.



Statute of FraudsStatute of Frauds

• Requires certain contracts to be in Requires certain contracts to be in writing and signed to be writing and signed to be enforceable.enforceable.– A contract involving an interest in A contract involving an interest in

land.land.– A contract that by its terms cannot be A contract that by its terms cannot be

performed within 1 year of execution.performed within 1 year of execution.– Collateral promises to answer for the Collateral promises to answer for the

debt of another.debt of another.



Statute of FraudsStatute of Frauds

– Prenuptial agreement. Prenuptial agreement. – Contracts for sale of goods over $500.Contracts for sale of goods over $500.

• Exceptions:Exceptions:– Partial performance and detrimental Partial performance and detrimental

reliance.reliance.

• Sufficiency of the writing.Sufficiency of the writing.• What must be contained in the writing?What must be contained in the writing?

– Essential Terms: parties, subject matter, Essential Terms: parties, subject matter, consideration and quantity.consideration and quantity.

© 2005 west legal studies in business a division of thomson learning chapter 8 capacity, legality,...

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