Consideration, Capacity, Legality and Writing Last 4 parts of a contract Consideration, Capacity, Legality and Writing

WHAT WILL YOU LEARN? Understand how ALL 6 parts of a contract are connected Review why mutual consideration is needed What is capacity and what rights are created Why must all contract be legal to be valid What contracts must be in writing to be valid

6 parts of a valid contract Offer and Acceptance Genuine Assent Consideration Capacity Legality Writing

What is Consideration? Consideration is the idea that both sides in a contract gain something “Fair” It also distinguishes between social promises (Gifts) and real contracts In order to have a valid agreement, there must be an exchange of value

What is an Exchange of Value? If I go into a store and decide to buy a box of cereal, I am saying that I agree to pay whatever the cost is because the cereal has value to me I am also saying that what I am paying is “Fair”, as I am willing to pay the price asked Store gets my money, I get the cereal (Exchange of value)

So, what is a gift then? A gift is when a donor (Person giving the gift) agrees to give something to the done (Person getting the gift) “Expecting nothing in return” In other words, only ONE SIDE gains something of value, therefore no contract

3 elements needed for Consideration Give (Each party must agree to give something to the other party) Trade (Proof what was promised to each side actually took place) Legal Value (Each party must gain something fair, not necessarily equal, that has legal value in the eyes of the law)

Adequacy of Consideration Courts do not usually allow arguments about the adequacy of consideration, but rather did the 2 sides get what they expected Ex) If I overpay for a classic car, knowing its only worth about $10,000 but I really want to get the person to sell it, I may offer them $15,000, $20,000 or even more, creating a situation where I think the offer is “Fair”, knowing I am overpaying

What is a Forbearance? A Forbearance is defined as “not doing something I have a legal right to do” Ex) If you take out student loans and after graduating from college, have a difficult time getting work, you may ask the bank for a Forbearance, in which they will make you sign an agreement stating you agree to make the payments, but at a later date. This protects both parties by making each sign something saying they will still pay AND owe the debt

How do promises create contracts? A promise can create a contract if it asks each party to do something (You do 8 hours of work and I agree to pay you) or it could also be something that may or may not be completed If I tell my neighbor I can fix their brakes on their car and it will cost them $50 to do so, but I’m not sure I will be able to do it, “If” the work does get done, based on the promise, they have a right to be paid

What does it mean to make a promise? Promises can create legal detriments (Taking on a responsibility based on a promise) or legal benefits (I gain something based on a promise) Detriments protect parties from not being taken advantage of Ex) If a person agrees to sell their house to a local business for 3 times its value, moves into another home, then the business backs out of the deal, since the detriment was created (Moving out expecting to be paid), the homeowner has a right to expect to get 3 times their old homes value

Can promises be made for obligations already set? YES Since a contract MUST contain consideration, you cannot bargain something you are already supposed to do (Existing Duty) Ex) If I buy a car and it contains a warranty for 3 years on everything that can go wrong, then I am asked to buy an additional extended warranty for another $3000, the contract can be considered invalid, since I already am covered by a warranty for 3 years, so essentially I am paying for nothing new

Can I make a Promise that I can back out from? YES Called “Illusory Promises”, meaning open ended It’s a promise where you can back out at anytime you want, but if you do what you promise to do, you have a right to get what was promised to you Ex) If I say to a local business “Listen, I will come and work for you IF you make me the General manager of your office, then if I ever decide to go to work for that company and the GM spot was open, I should get it

Are there any Promises that cannot be backed out of? YES Promises that are gifts or considered open ended can be enforced under an idea called “Promissory Estoppel” Promissory Estoppel is a legal rule that protects charities or people who take on some type of legal detriment “Expecting” a promise to take place Ex) If I am a hospital and I am taking donation to add to a Cancer Center and a business promises to donate $40,000 to the cause, then the hospital starts building the addition expecting the money, they can force the donor (The business) to donate the $40,000 as they expected it and start to act based on the promise

Elements of Promissory Estoppel The Party whom the promise was made to (Promisee) relies on the promise The promisee acts in reliance (Does something) based on the promise The promisee would suffer a “Significant” economic loss if the promise was not fulfilled Courts must intervene to enforce the promise

Other issues with Consideration Neither party can bargain based on past performance (Meaning something that’s already taken place If a debt is “Liquidated” it means that both parties agree a debt exists and to its amount If a debt is “Unliquidated” a debt is disputed, meaning one of the parties either disagrees they owe a debt or they disagree to the amount owed When a party is released from a contract, all obligations and duties end (Terminate). Ex) Paying the last payment on a car loan “releases” the person from the contract and they now own the car outright

Review Worksheet Complete and turn in by the next class for a grade

CAPACITY RIGHTS Capacity Offer and Acceptance Genuine Assent Consideration Capacity Legality Writing

What is Capacity? Capacity is a contract rule stating both parties involved in a contract must understand the contract and their own actions In other words, both parties must meet certain requirements to prove capacity Minors (Under 18), intoxicated people (Sometimes) and mentally impaired people have protections from “SOME” purchases

Protected Parties Minors: Anyone under 18 has protections against luxury purchases (Non-Necessary items) but no protection for purchase of non-luxury purchases (Necessary items). Intoxicated: Some intoxicated contracts can be voided “If” there is proof the parties were not already negotiating before the deal was made. Again, only protected for Non-Necessary items. Mentally Impaired: Anyone who is legally shown to have a severe mental illness, severe mental retardation or severe senility. Again, they are protected against “Major” purchases meaning Non Necessary items

Necessary vs. Non Necessary Necessary items: Items needed to maintain life and lifestyle like food, clothing and shelter (Basic needs) Non- necessary items: Luxury purchases like expensive jewelry, cars, property, homes or more. *** Minors, intoxicated people and mentally impaired people “MUST” pay the ticket price, but have the right to disaffirm the contract if they can later show it’s a Non necessary and they cannot afford it

Do Minors have any other Contract Rights? Emancipation Rights Emancipation means a severing of the child-parent relationship, or to say the parent is not responsible anymore for the child Formal Emancipation: Court Ordered Information Emancipation: Through specific actions

What does it mean to Informally Emancipate? The Child and Parent agree to cease support The Minor gets Married The Minor moves out Minor joins the armed forces Minor gives birth Minor obtains a full-time job

Are there any contracts that cannot be disaffirmed for any reason? Any court approved contracts Major Commitments (Joining military, student loans) Banking Contracts Insurance Contracts Work-related Contracts Sale of Reality (Real property, buildings) Apartment rentals (in some states)

Other Capacity Issues If a Minor misrepresents their age (Lies about it), then enters a contract, they are STILL protected for luxury purchases (But they can be arrested for misrep) If a party lacks capacity, they have the right to disaffirm a contract right away or within a reasonable time after, even if they turn 18 in the process

Review Worksheet Complete and turn in by the next class for a grade

Legality of Contracts…. Any contract that involves contracting for an illegal act is void and unenforceable “Most times”, even if the parties are “Unaware” the situation is not legal The violation of the law must be major and if both parties should be aware the law was broken, the contract is considered void

Can illegal contracts be enforced? Yes, sometimes If one party is unaware of a minor violation of the law and creates a contract with the other party, they still have the right to sue for damages Ex) If you order supplies from a local business and their license to practice runs out, “They” are in violation of the law, you are not. Therefore, if they fail to live up to their obligation and provide the supplies as ordered, you can sue them in court to get back what you lost.

How does the law determine what violations could not be known by victim? Statutes: Laws that explicitly state some contracts are unenforceable (Selling illegal animals in NY State) Public Welfare: Courts look at the impact of the violation on the public (If I contracted with someone to steal company secrets, it would effect a lot of people) Connection: Courts look at how directly the contract and the violation of the law are connected (For example, if someone is paid to rob a store, its clearly connected and an easy violation of the law in order to complete the contract) Involvement: How connected to the violation of the law are the 2 parties in the contract (The more connected, the contract is void. If it’s a minor connection, then the contract may be legal and enforceable, like the supply example)

Categories of Illegal Contracts.. Contracts illegal based on law: If the law says you cannot do something, its illegal and cannot be part of a contract (Gambling, high interest, illegal discrimination) Obstructing legal procedures: Any court determined thing or stopping a court action is illegal (Bribing jurors, paying non-expert witnesses) License requirements: Certain business or professions require proper licenses to perform contracts (Teachers, Doctors, CPA and more) Effecting Marriage Negatively: Cannot contract to stop or end a marriage by someone not a party to the marriage Trade Laws: “Illegal not to compete”, price fixing or other insider agreements that go outside the law. Competition!

Is it legal to stop someone from leaving your business? Yes, it can be Called a “Covenant not to compete” clause States that if an express based employee (Contract for a time) wants to break their contract early, the business has a right to get proper consideration for allowing them to leave early Ex) If I allow a partner to leave my law firm, I may make them sign a covenant not to compete contract in which they agree not to steal clients, compete against my business locally for a period of time and sell my secrets. Its called protecting my property…

What happens if a contract has legal and illegal parts in it? If contracts contain legal and illegal parts, courts can make one of 2 determinations #1: Make the entire contract illegal, therefore void #2: Make the contract “Divisible”, meaning divide it into legal parts (Enforceable) and illegal parts (Void) Ex) If you go to a pet store and buy a new dog and a fish, that is illegal to own in the state of NY, the court may determine you can own the dog legally, but must return or dispose of the illegal fish, making the contract void.

What does it mean to have an unconscionable act? Something is considered “Unconscionable” if the contract contains something that is so grossly unfair, the party that accepts the unfair offer would not normally do so under normal circumstances If a contract is determined to be Unconscionable, its considered void Ex) If a hurricane goes through a town and wipes out homes, roads and therefore the ability to gets supplies and local retailers decide to highly raise the price of basic goods (Food, water, etc), a court could force them to sell the goods at a fair market price, so not to take advantage of people who are powerless.

What law states contract must be in writing to be considered valid? Its called the Statute of Frauds It’s a law that states if a contract means certain requirements, it must be in writing to be considered valid “MOST” contracts do not need to be in writing, therefore are considered outside or without the statute of frauds The Statute of Frauds exists because some contracts are so complex or contain so many terms or are for high amounts of money, the writing is proof and used if a dispute comes up

Within the Statute of Frauds Contracts to buy and Sell real property (Land, buildings) Contracts that take more than a year to complete (Work related, loans) Contracts where a co-signer is needed to take out a loan (Promising to pay a debt if the other person does not) Contracts where the sale is over $500 (All parts of the purchase) Marriage contracts that contain consideration

Why must Real Property Contracts be in writing? Tax purposes Insurance purposes Re sale purpose Claim to land Legal boundaries Large $ purchase Dispute purpose

Why must Contracts taking more than a year be in writing? Usually based on a payment arrangement Work related (Express) Details in writing used for any disputes More time, more details needed Dispute purposes

Why must Co Signer contracts be in writing? Co “Signer” (Signing off for another person lacking or without good credit) Proof of the 3rd party involved Writing lays out details of responsibilities Protection for credit company and creditor Disputes

Why must $500 contracts or more be in writing? Large dollar purchases (Cars, appliances, equipment) Protection for warranties Disputes Total purchase must be at $500 or more (Buying a $490 refrigerator and adding a $40 warranty means the total purchase is $530, therefore must be in writing)

Why must marriage with consideration contracts be in writing? Marriage contracts do NOT need to be in writing With consideration means you gain something based on the marriage Usually, part ownership in business, land or some home Both partners now have duel ownership based on marriage based on “Agreed” terms

What must be included in the writing? “Essential Terms” Names of parties Description of subject matter How you will be paid When you will be paid Signature AND, any other items the parties think is needed

AND? EXAM PART V: Thursday June 7th Exam Review Sheets: Tomorrow- Wed