chapter 9: contracts – consideration, capacity, and legality

1

Chapter 1: Legal EthicsCHAPTER 9: CONTRACTS –

CONSIDERATION, CAPACITY, AND LEGALITY

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Learning Objectives1. What is consideration? What is required for

consideration to be legally sufficient?2. In what circumstances might a promise be

enforced despite a lack of consideration?

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Learning Objectives3. Does a minor have the capacity to enter into

an enforceable contract? What does it mean to disaffirm a contract?

4. Under what circumstances will a covenant not to compete be enforceable? When will such covenants not be enforced?

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Learning Objectives5. What is an exculpatory clause? In what

circumstances might exculpatory clauses be enforced? When will they not be enforced?

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Consideration Generally, consideration must have:–“Legally Sufficient Value” and –a “Bargained-for-Exchange.”

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Consideration Legally Sufficient Value can mean:–Promise,–Performance, or–Forbearance.

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Consideration Bargained-for-Exchange: must provide

basis for the bargain.–Something of legal value (a promise, or

a performance) must be exchanged between the parties. –The promise must be either legally

detrimental to the promisee, or legally beneficial to the promisor.

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Consideration Adequacy of Consideration:–Courts typically will not consider.– Law does not protect a person from entering

into an unwise contract.–Cases of “shockingly inadequate

consideration” may raise a red flags, and be ruled unconscionable.

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Consideration Agreements That Lack Consideration.–Preexisting Duty.• Promise to do what one already has a

legal duty to do does not constitute legally sufficient consideration.• Unforeseen Difficulties. • Recession and New Contract.

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Consideration Agreements That Lack Consideration.– Past Consideration: no consideration

because the bargained-for exchange element is missing.

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Consideration Agreements That Lack Consideration.– Illusory Promises: promisor has not

definitely promised to perform because consideration is lacking, and unenforceable.

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Consideration Settlement of Claims.–Accord and Satisfaction.• Settlement for lessor amount; debt must

be in dispute.–Liquidated Debts: debt is certain, accord

and satisfaction cannot occur.–Unliquidated Debts: amount not settled.

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Consideration Settlement of Claims.–Release: Good faith, signed writing,

consideration.–Covenant Not to Sue: does not always

bar further recovery.

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Promissory Estoppel Promissory Estoppel (“detrimental

reliance”):– Doctrine applies when a person relies

on the promise of another to her legal detriment. –Promisor is “estopped” (precluded) from

revoking the promise.

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Consideration Promissory Estoppel. Elements:–Must be definite promise.–Promisee must justifiably rely on the

promise.–Reliance is substantial.–Justice will be served by enforcing

promise.

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Consideration Promissory Estoppel. –Application of the Doctrine. –CASE 9.1 HARVEY V. DOW (2011).

What actions or words did Teresa rely on to her legal detriment?

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Contractual Capacity Minors: at 18 years, a person is

emancipated, and has the legal capacity to enter into any contract that an adult can.–However, a contract entered into by a

minor is voidable at the option of that minor, and can be disaffirmed.

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Contractual Capacity Minors.–Disaffirmance.• A contract can be disaffirmed at any time

during minority, or for a reasonable period after minor is emancipated.•Minor must disaffirm the entire contract.

Disaffirmance can be expressed or implied.

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Contractual Capacity Minors.–Ratification: when minor reaches the

age of majority, he can ratify a contract created while minor.–Parents’ Liability: generally, parents are

not liable for minors, except for necessaries.

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Contractual Capacity Intoxication.–Lack of capacity at the time the contract

is being made. Contract is either voidable or valid, depending on circumstances. –Disaffirmance (voidable).–Ratification: after ‘sobering up.

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Contractual Capacity Mental Incompetence.–Void: person is adjudged mentally

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

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Contractual Capacity Mental Incompetence (cont’d).–Voidable: person does not know she is

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

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Contractual Capacity Mental Incompetence (cont’d).–Valid: when person is able to

understand the nature and effect of entering into a contract but may lack capacity to engage in other activities (known as “lucid” intervals).

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Legality A contract must be formed for a legal

purpose. A specific clause in contract can be

illegal, but rest of contract can be enforceable.

Contract to commit a tortious act is illegal.

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Legality• Contracts Contrary to Statute.– A contract must be formed for a legal purpose.– A specific clause in contract can be illegal, but rest

of contract can be enforceable.– A contract to commit a tortious act is illegal.

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Legality• Contracts Contrary to Statute.– Any contract prohibited by federal or state

statutory law is illegal and therefore void (never existed).

– Contracts to Commit a Crime.– Contracts for Usury.

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Legality• Contracts Contrary to Statute.– Gambling: distribution of property based on

chance among persons who have paid valuable consideration.–Licensing Statutes: contract’s enforceability

depends on purpose.• CASE 9.2 STURDZA V. UNITED ARAB EMIRATES (2011). Do

you think this decision was fair?

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Legality

Contracts Contrary to Public Policy.–Contracts contrary to public policy are void.–Contracts in Restraint of Trade are

generally void.• Exception: Covenant not to Compete and Sale

of an Ongoing Business. • Exception: Covenant Not to Compete in

Employment.

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Legality

Unconscionable Contracts or Clauses.–Procedural Unconscionability:

inconspicuous print or legalese.• Depends on a party’s lack of knowledge or

expertise. –Substantive Unconscionability.• Contracts are oppressive or overly harsh;

that deny a remedy for nonperformance.

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Legality

Unconscionable Contracts or Clauses.–Substantive Unconscionability.• CASE 9.3 LHOTKA V. GEOGRAPHIC

EXPEDITIONS, INC. (2010). Why was the arbitration clause unenforceable?

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Legality

Exculpatory Clauses.–Release a party from liability in the

event of monetary or physical injury – no matter who is at fault.• Enforceable when they are not against

public policy, are not ambiguous, and do not shield parties from intentional conduct.

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Legality The Effect of Illegality.–Generally, an illegal contract is void.–Both parties are considered to be at

fault, and neither party has any rights or duties.–Courts are not generally concerned

about unjust enrichment in an illegal contract.

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Legality The Effect of Illegality.–Justifiable Ignorance of the Facts.• If one party is ‘innocent’, she can recover

if there has been unjust enrichment.• Likewise, if an innocent party has fully

performed, courts may enforce the contract against the other party.

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Legality The Effect of Illegality.–Members of Protected Classes.•When a statute protects a certain class of

people, a member of that class can enforce the contract, even though the other party cannot.

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Legality The Effect of Illegality.–Withdrawal from an Illegal Agreement.• If the contract is executory, a party can

withdraw from the contract, and recover the performance or its value.

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Legality The Effect of Illegality.–Severable, or Divisible, Contracts.• Distinct parts that can be performed

separately, with separate consideration for each part.

–Fraud, Duress, or Undue Influence.• Party to an illegal contract may be able to

recover if wrongfully induced.