Contracts: Capacity, Legality, Assent, and Form BUSINESS LAW TODAY Essentials 9th Ed. Roger LeRoy Miller - Institute for University Studies, Arlington, Texas Gaylord A. Jentz - University of Texas at Austin, Emeritus Chapter 9 Contracts: Capacity, Legality, Assent, and Form

Learning Objectives Does a minor have the capacity to enter into an enforceable contract? What does it mean to disaffirm a contract? What is an exculpatory clause? In what circumstances might exculpatory clauses be enforced? When will they not be enforced? In what types of situations might voluntary consent to a contract’s terms be lacking? What are the elements of fraudulent misrepresentation? What contracts must be in writing to be enforceable?

Contractual Capacity The legal ability to enter into a contractual relationship. Full competence. No competence. Limited competence.

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

Exceptions to Minor’s Right to Disaffirm Misrepresentation of Age. Generally, minor can disaffirm the contract. But growing number of 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.

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 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 Contracts. Torts (Statutes Vary): 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.

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 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 A contract to do something prohibited by federal or state statutory law is illegal and therefore void (never existed). Contracts Contrary to Statute. Contracts to commit a crime. Usury. Gambling. Licensing Statutes.

Contracts in Restraint of Trade Covenants not to Compete and the Sale of an Ongoing Business. Covenants Not to Compete in Employment Contracts are legal as long as the duration and geographic limits are reasonable. CASE 9.1 Comedy Club, Inc. v. Improv West Associates (2009). Covenant not to compete for 14 years covering 48 states was too broad and therefore invalid.

Unconscionable Contracts Procedural Unconsionability: adhesion contracts. Substantive Unconsionability: when terms of contract are oppressive or overly harsh.

Unconscionable Contracts

Exculpatory Clauses Release a party from liability in the event of monetary or physical injury, no matter who is at fault. Courts generally view these clauses with disfavor.

Effect of Illegality Justifiable Ignorance of the Facts. Members of Protected Classes. Withdrawal from an Illegal Agreement. Severable or Divisible Contracts. Contract Illegal through Fraud, Duress, or Undue Influence.

Voluntary Consent: Mistakes

Mistakes Mistake of Value (or Quality). Unilateral Mistake (of Fact). Contract is enforceable. Unilateral Mistake (of Fact). Party does not have the right to cancel contract unless: (1) the non-mistaken party knew or should have known about the mistake, or (2) there is a clerical error.

Mistakes Bilateral (Mutual) Mistakes—if both are mistaken, either one can cancel the contract. CASE 9.2 Inkel v. Pride Chevrolet-Pontiac, Inc. (2008). For mutual mistake to occur, both parties must have been mistaken about a material fact. This was a matter of fact for a jury.

Fraudulent Misrepresentation Contract is voidable by innocent party. Injured party must show: Misrepresentation of a material fact (not opinion) by conduct, of law, silence, or words. Opinion is not fact (unless it is an expert opinion). CASE 9.3 Rosenweig v. Givens (2009). Whether fraud was committed in the context of a fiduciary relationship between the parties was a question of fact for a jury.

Fraudulent Misrepresentation Injured party must show (cont’d): Intent to deceive. Also known as “scienter.” Innocent party must have justifiably relied on the misrepresentation. Plaintiff must have suffered a legal injury.

Undue Influence & Duress Arises from a special relationship of trust. A stronger party overcomes a weaker party’s free will by exerting psychological influence. Duress. Threat of physical force or extortion. Can serve as basis for rescission of contract. Economic need, by itself, is not duress.

Form: Statute of Frauds

Statute of Frauds—Writing Requirement Requires certain contracts to be in writing and signed to be enforceable, as follows: Interest in Land: A contract involving an interest in land. Includes sales, fixtures, leases, mortgages, and easements. One Year Rule: A contract that by its terms cannot be performed within 1 year of execution. 

‘One Year Rule’

Statute of Frauds Collateral Promises: answer for the debt of another. Contracts with Primary vs. Secondary Obligations. Only secondary obligations must be in writing. Exception – “Main Purpose” Rule: guarantor seeks to secure personal benefit. Promises Made in Consideration of Marriage. Unilateral promise for money or property must be in writing.

Statute of Frauds Contracts for the Sale of Goods over $500 must be in writing. Exceptions: Partial performance, detrimental reliance.

Statute of Frauds--Exceptions Exceptions to Statute of Frauds: Admissions by party against whom enforcement is sought. Promissory Estoppel (or Detrimental Reliance). Special UCC Exceptions. Oral contracts for sale of customized goods may be enforced. Oral contracts between merchants may be enforced.

Statute of Frauds— Sufficiency of the Writing What Constitutes a Writing? Written contract(s) or memorandum(s) (paper or electronic) SIGNED by the party against whom enforcement is sought (typically the defendant in the case). Documents can be “incorporated” into each other. What Must be Contained in the Writing? Essential terms only. Must name parties. Be signed by party against whom enforcement is sought (usually the Defendant). Proving an “e-signature” is a matter for trial.