Slide 1 : 1 Contracts: Capacity and Legality Chapter10 BUSINESS LAW TODAY Standard 8th Ed.Roger LeRoy Miller - Institute for University Studies, Arlington, TexasGaylord A. Jentz - University of Texas at Austin, Emeritus
Learning Objectives : 2 Learning Objectives What are some exceptions to the rule that a minor can disaffirm (avoid) a contract?
Does an intoxicated person have the capacity to enter into an enforceable contract?
Does the mental incompetence of one party necessarily make a contract void?
Under what circumstances will a covenant not to compete not to compete be enforceable? When will such covenants not be enforced?
What is an exculpatory clause? Under what circumstances might exculpatory clauses be enforced when will they not be enforced?
Contractual Capacity : 3 Contractual Capacity The legal ability to enter into a contractual relationship.
Full competence.
No competence.
Limited competence.
Legality : 4 Legality The agreement must not call for the performance of any act that is criminal, tortious, or otherwise opposed to public policy.
Minors : 5 Minors In most states, a person is no longer a minor for contractual purposes at the age 18.
A minor can enter into any contract that an adult can.
A contract entered into by a minor is voidable at the option of that minor.
Disaffirmance : 6 Disaffirmance A contract can be disaffirmed at any time during minority or for a reasonable period after the minor comes of age.
Minor must disaffirm the entire contract.
Disaffirmance can be expressed or implied.
Minor’s Obligation on Disaffirmance : 7 In most states, minor need only return the goods (or other consideration) subject to the contract, provided the goods are in the minor’s possession or control.
In increasing number of states, the minor must restore the adult to the position held before the contract was made. Minor’s Obligation on Disaffirmance
Exceptions to Minor’s Right to Disaffirm : 8 Exceptions to Minor’s Right to Disaffirm Misrepresentation of Age.
Generally, minor can disaffirm the contract.
But some states prohibit disaffirmance and hold the minor liable.
Contracts for Necessaries.
Contracts for food, clothing, shelter may be disaffirmed by minor, who remains liable for the reasonable value of goods or services.
CASE 10.1. Yale Diagnostic Radiology v. Estate of Harun Fountain (2004).
Exceptions to Minor’s Right to Disaffirm : 9 Exceptions to Minor’s Right to Disaffirm Insurance.
Not viewed as necessaries, so minor can disaffirm contract and recover all premiums paid.
Loans.
Seldom considered to be necessaries.
Exception:
Loan to a minor for the express purpose of enabling the minor to purchase necessaries.
Ratification : 10 Ratification Occurs when a minor, on or after reaching majority, indicates (expressly or impliedly) an intention to become bound by a contract made as a minor.
Executed v. Executory contracts.
Parent’s Liability : 11 Contracts.
Parents not liable (This is why parents are usually required to sign any contract made with a minor).
Torts (Statutes Vary):
Minors are personally liable for their own torts.
Liability imposed on parents only for willful acts of their minor children.
Liability imposed on parents for their children negligent acts that result from their parents’ negligence. Parent’s Liability
Intoxicated Persons : 12 Intoxicated Persons Lack of contractual capacity at the time the contract is being made.
Contract can be either voidable or valid.
Courts look at objective indications to determine if contract is voidable.
If voidable:
Person has the option to disaffirm, or
Person may ratify the contract expressly or impliedly.
Mentally Incompetent Persons : 13 Mentally Incompetent Persons Void.
If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed.
Voidable.
If the person does not know he or she is entering into the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences.
Valid.
If person is able to understand the nature and effect of entering into a contract yet lacks capacity to engage in other activities.
Lucid Interval.
Legality : 14 Legality A contract to do something prohibited by federal or state statutory law is illegal and therefore void (never existed).
Contract that calls for for a tortious act.
Contract that calls for an act contrary to public policy.
Contracts Contrary to Statute : 15 Contracts Contrary to Statute Usury.
Gambling.
Sabbath Laws.
Licensing Statutes.
Contracts to Commit a Crime.
Contracts Contrary to Public Policy : 16 Contracts contrary to public policy are void.
Unconscionable Contracts or Clauses.
Procedural or Substantive Unconscionability.
Exculpatory Clauses.
Discriminatory Contracts.
Contracts for the Commission of a Tort. Contracts Contrary to Public Policy
Contracts Contrary to Public Policy : 17 Contracts Contrary to Public Policy Contracts in Restraint of Trade
Anti-Competitive Agreements are void.
Exception: Covenant not to Compete and Sale of Business.
Covenants Not to Compete in Employment Contracts. Valid if reasonable time and geographic restrictions.
CASE 10.2 Thibodeau v. Comcast Corp. (2006).
Unconscionable Contract : 18 Unconscionable Contract
Effect of Illegality : 19 Effect of Illegality Justifiable Ignorance of the Facts.
Members of Protected Classes.
Withdrawal from an Illegal Agreement.
Contract Illegal through Fraud, Duress, or Undue Influence.
Severable or Divisible Contracts.