Chapter 13 Contracts: Capacity and Legality BUSINESS LAW: Text & Cases — Legal, Ethical, International, and E-Commerce Environment 11th Ed. Chapter 13 Contracts: Capacity and Legality Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

§1: Contractual Capacity The legal ability to enter into a contractual relationship. Full competence. No competence. Limited competence. Legality. The agreement must not call for the performance of any act that is criminal, tortious, or otherwise opposed to public policy. Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

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. Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

Minor’s Right to Disaffirm 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. Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

Minor’s Obligations 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. Minority rule: increasing number of states hold the minor must restore the adult to the position held before the contract was made. Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

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 13.1 Yale Diagnostic Radiology v. Estate of Harun Fountain (2004). Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

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. Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

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. Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

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. Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

Intoxication 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 dissaffirmed (voidable): Person has the option to disaffirm, or Person may ratify the contract expressly or impliedly. Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

Mental Incompetence 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. Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

§2: 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.  Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

Contracts Contrary to Statute Contracts to Commit a Crime. Usury. Gambling (online). Sabbath (Sunday) Laws. Licensing Statutes. Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

Contracts Contrary to Public Policy 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. Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

Contracts Contrary to Public Policy Contracts in Restraint of Trade Anti-Competitive Agreements are void. Exception: Covenant not to Compete and Sale of Business. Exception: Covenant not to Compete in Employment. CASE 13.2 Stultz v. Safety and Compliance Management, Inc. (2007). Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

Contracts Contrary to Public Policy Unconscionable Contracts/Clauses. Exculpatory clauses. CASE 13.3 Thibodeau v. Comcast Corp. (2006). Other Contracts Contrary to Public Policy. Contracts that promise to discriminate.  Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

Exhibit 13.1 Unconscionability Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

Effect of Illegality Generally, the rule is that the contract is void. Exceptions: 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. Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

Exhibit 13.2 Legality Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.