© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C HAPTER 8 C APACITY, L EGALITY, AND E NFORCEABILITY

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L EARNING O BJECTIVES  Does a minor have the capacity to enter into an enforceable contract?  What does it mean to disaffirm a contract?  Under what circumstances will a covenant not to compete be enforced?  2

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L EARNING O BJECTIVES  When will such covenants not be enforced?  What is an exculpatory clause? In what circumstances might exculpatory clauses be enforced? When will they not be enforced?  3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L EARNING O BJECTIVES  What is the difference between a mistake of value or quality and a mistake of fact?  What are the elements of fraudulent misrepresentation? 4

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C ONTRACTUAL C APACITY  The legal ability to enter into a contractual relationship: Person determined by court to be mentally incompetent cannot form a valid contract. In other situations, capacity may exist but contract is not legally binding. 5

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C ONTRACTUAL C APACITY  Minors. Generally, 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.  6

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C ONTRACTUAL C APACITY  Minors. Disaffirmance: contract can be disaffirmed (set aside) 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. 7

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C ONTRACTUAL C APACITY  Minors. Minor’s Obligation on Disaffirmance. Majority Rule: minor need only return the goods (or other consideration) subject to the contract, provided the goods are in the minor’s possession or control.  8

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C ONTRACTUAL C APACITY  Minors. Minor’s Obligation on Disaffirmance. Minority Rule: increasing number of states hold the minor must restore the adult to the position held before the contract was made. 9

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C ONTRACTUAL C APACITY  Minors. Exceptions to a 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. 10

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C ONTRACTUAL C APACITY  Minors. Exceptions to a Minor’s Right to Disaffirm. 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. Parents’ Liability: Parents generally not liable, unless they co-sign with minor. 11

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C ONTRACTUAL C APACITY  Intoxicated Persons. Lack of capacity at the time the contract is being made. Contract is either voidable or valid, depending on circumstances. Ratification after ‘sobering up’? 12

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C ONTRACTUAL C APACITY  Mentally Incompetent Persons. Void: If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed.  13

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C ONTRACTUAL C APACITY  Mentally Incompetent Persons. 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.  14

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C ONTRACTUAL C APACITY  Mentally Incompetent Persons. 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). 15

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L EGALITY  For a contract to be enforceable, it 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 (see Chapter 4). 16

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L EGALITY  Contracts Contrary to Statute. Contracts to do something prohibited by federal or state statutory law is illegal and therefore void (never existed). Usury. 17

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L EGALITY  Contracts Contrary to Statute. Gambling. Distribution of property based on chance among persons who have paid valuable consideration. Online Gambling: Unlawful Internet Gambling Enforcement Act (2006) bars electronic payments, allows civil forfeiture. 18

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L EGALITY  Contracts Contrary to Statute. Licensing Statutes. Contract’s enforceability depends on purpose. CASE 8.1 Sturdza v. United Arab Emirates (2011). What could Sturdza have done to protect herself contractually? 19

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L EGALITY  Contracts Contrary to Public Policy. Contracts contrary to public policy are void. Contracts in Restraint of Trade are generally void. Exceptions: Covenant not to Compete and Sale of an Ongoing Business.  20

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L EGALITY  Contracts Contrary to Public Policy. Contracts in Restraint of Trade. Exceptions: Covenant not to Compete in Employment is enforceable as long as time and geographic terms are reasonable. CASE 8.2 Comedy Club, Inc. v. Improv West Associates (2009). What factors did the court consider? 21

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L EGALITY  Contracts Contrary to Public Policy. Unconscionable Contracts or Clauses. Procedural Unconscionability: inconspicuous print or legalese. Depends on a party’s lack of knowledge or expertise. 22

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L EGALITY  Contracts Contrary to Public Policy. Unconscionable Contracts or Clauses. Substantive Unconscionability: contracts are oppressive or overly harsh; that deny a remedy for nonperformance. 23

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L EGALITY  Contracts Contrary to Public Policy. 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. 24

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. U NCONSCIONABILITY 25

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L EGALITY  Generally, illegal contracts are void. If contract is executory, cannot be enforced. Unjust enrichment is not an issue. 26

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L EGALITY  Generally, neither party can recover unless: (1) Justifiable Ignorance of the Facts. Relatively innocent party can recover some of the benefit. 27

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L EGALITY  Generally, neither party can recover unless: (2) Members of Protected Classes. If contract references a certain group of people (e.g., airline pilots) a member of that group can enforce the illegal contract even though the other party cannot. 28

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L EGALITY  Generally, neither party can recover unless: (3) Withdrawal from an Illegal Agreement. If the illegal part of a bargain has not been performed, the party rendering performance can withdraw from the contract and recover the performance or its value. 29

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L EGALITY  Generally, neither party can recover unless: (4) Severable, or Divisible, Contracts. Contract that consists of independent performance clauses with separate consideration. If contract contains both illegal and legal performance, courts will enforce the contract as long as illegal parts do not materially impact the contract. 30

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L EGALITY  Generally, neither party can recover unless: (5) Fraud, Duress, or Undue Influence. When a party has been wrongfully induced to enter into a contract by the other party, the innocent party will be allowed to recover for performance or its value. 31

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. V OLUNTARY C ONSENT  Mistakes. Only a mistake of fact (not value) allows a contract to be canceled. Mistakes of fact occur in two forms: unilateral and bilateral.  32

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. V OLUNTARY C ONSENT  Mistakes. Unilateral Mistakes cannot be canceled unless: (1) Other party to the contract knows or should have known that a mistake of fact was made, OR 33

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. V OLUNTARY C ONSENT  Mistakes. Unilateral Mistakes cannot be canceled unless: (2) Mistake was mathematical, made inadvertently and without gross negligence. Bilateral (Mutual) Mistakes can be rescinded by either party. 34

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. E XHIBIT 8.1 M ISTAKES OF F ACT 35

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. V OLUNTARY C ONSENT  Fraudulent Misrepresentation. Contract is Voidable by Innocent Party. Consists of the following elements: Misrepresentation of Material Fact. Intent to Deceive. Reliance on Misrepresentation. Injury to the Innocent Party. 36

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. V OLUNTARY C ONSENT  Fraudulent Misrepresentation. Misrepresentation Has Occurred. By Conduct: Occurs when a party takes specific action to conceal a fact that is material to the contract. Statements of Opinion: generally, opinions are not actionable, unless it is an “expert” opinion.  37

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. V OLUNTARY C ONSENT  Fraudulent Misrepresentation Misrepresentation Has Occurred. By Law: ordinarily does not entitle a party to cancel a contract. 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 buyer.  38

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. V OLUNTARY C ONSENT  Fraudulent Misrepresentation Misrepresentation Has Occurred. By Silence: when parties are in a fiduciary relationship, failure to disclose material facts may be fraud. CASE 8.3 Fazio v. Cypress/GR Houston I, LP (2012). What was the fiduciary relationship in this case? 39

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. V OLUNTARY C ONSENT  Fraudulent Misrepresentation. Intent to Deceive requires scienter (guilty knowledge). Party knows that a ‘fact’ is not true, or makes a reckless statement without regard for the truth, or implies that statement is based on personal knowledge or investigation. 40

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. V OLUNTARY C ONSENT  Fraudulent Misrepresentation. Reliance on Misrepresentation. Deceived party must have justifiably relied on representation. Reliance is not justified if the innocent party knows the true facts or relies on extravagant statements. 41

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. V OLUNTARY C ONSENT  Fraudulent Misrepresentation. Injury to the Innocent Party. No proof of injury is required when the action is to rescind contract. Proof of injury is universally required to recover damages. 42

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. U NDUE I NFLUENCE  Contract lacks voluntary consent and is voidable. Based on confidential or fiduciary relationship, or dependence. Presumed if weaker party is talked into doing something not beneficial to him or herself. 43

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. D URESS  Forcing a party to enter into a contract under fear or threat makes the contract voidable.  Threatened act must be wrongful or illegal and render person incapable of exercising free will. Threat of civil suit is not duress.  44

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. D URESS  Economic Duress: generally not sufficient to constitute duress, unless same party who created the need also requires the money. 45

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. T HE W RITING R EQUIREMENT  Another defense to enforceability is the form of the contract.  Certain types of contracts must be in writing and signed by the party against whom enforcement is sought to be enforceable.  46

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. T HE W RITING R EQUIREMENT  To be enforceable, the following types of contracts must be in writing and signed: Contracts involving an Interest in Land. Contracts involving “One-Year Rule.” Collateral or Secondary Contracts.  47

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. T HE W RITING R EQUIREMENT  The following types of contracts must be in writing and signed: Promise Made in Consideration of Marriage. Contracts for the Sale of Goods priced at $500 or more. 48

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. T HE W RITING R EQUIREMENT  Interests in Land. All contracts for the transfer of any interest in land, including mortgages, easements, and leases.  49

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. T HE W RITING R EQUIREMENT  One Year Rule. A contract that cannot, by its own terms, be performed within one year from the date it was formed. One-year period begins to run the day after the contract is made. Test: Whether performance is possible (although unlikely) within one year.  50

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. E XHIBIT 8.3 O NE Y EAR R ULE 51

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. T HE W RITING R EQUIREMENT  Collateral Promises. Secondary promise made to a third party to assume the debts and obligations of the primary debtor. 52

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. T HE W RITING R EQUIREMENT  Collateral Promises. Primary v. Secondary Obligations. Primary: does not need to be in writing. Secondary: must be in writing to be enforceable. Exception--“Main Purpose Rule”. Oral contract is enforceable if main purpose is benefit to guarantor. 53

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. T HE W RITING R EQUIREMENT  Promises in Consideration of Marriage. Unilateral promise to make monetary payment or gift in consideration of a promise to marry must be in writing. Same applies to prenuptial agreements. 54

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. T HE W RITING R EQUIREMENT  Sales of $500. UCC requires a writing or memorandum for the sale of goods priced at $500 or more. 55

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. T HE W RITING R EQUIREMENT  Exceptions to Writing Requirement. Partial Performance. Admissions. Promissory Estoppel. Special Exceptions under the UCC. 56

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. E XHIBIT 8.4 C ONTRACTS S UBJECT TO S TATUTE OF F RAUDS 57

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. T HE W RITING R EQUIREMENT  Sufficiency of the Writing. Requires a ‘written memorandum’ (written or electronic) signed by the party against whom enforcement is sought. What Constitutes a Writing? Just about anything, including fax and .  58

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. T HE W RITING R EQUIREMENT  Sufficiency of the Writing. What Must Be Contained in the Writing? The essential terms: quantity, signed by party to be charged, names of parties, subject matter, consideration. Sales of land must state the price and description with sufficient clarity.  59