© 2008 West Legal Studies in Business A Division of Thomson Learning 1 BUSINESS LAW TODAY Essentials 8 th Ed. Roger LeRoy Miller - Institute for University Studies, Arlington, Texas Gaylord A. Jentz - University of Texas at Austin, Emeritus Chapter 8 Contracts: Capacity, Legality, Assent, and Form

© 2008 West Legal Studies in Business A Division of Thomson Learning 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?  In what types of situations might genuineness of assent to a contract’s terms be lacking?  What elements must exist for fraudulent misrepresentation to occur?  What contracts must be in writing to be enforceable?

© 2008 West Legal Studies in Business A Division of Thomson Learning 3 Contractual Capacity  The legal ability to enter into a contractual relationship. Full competence. No competence. Limited competence.

© 2008 West Legal Studies in Business A Division of Thomson Learning 4 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.

© 2008 West Legal Studies in Business A Division of Thomson Learning 5 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.

© 2008 West Legal Studies in Business A Division of Thomson Learning 6  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

© 2008 West Legal Studies in Business A Division of Thomson Learning 7 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.

© 2008 West Legal Studies in Business A Division of Thomson Learning 8 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.

© 2008 West Legal Studies in Business A Division of Thomson Learning 9 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.

© 2008 West Legal Studies in Business A Division of Thomson Learning 10 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.

© 2008 West Legal Studies in Business A Division of Thomson Learning 11 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.

© 2008 West Legal Studies in Business A Division of Thomson Learning 12 Legality  A contract to do something prohibited by federal or state law is illegal and therefore void (never existed). Contracts to Commit a Crime. Usury. Gambling (online). Sabbath (Sunday) Laws. Licensing Statutes: doctors, lawyers, engineers, real estate brokers, etc. Contract that calls for an act contrary to public policy. 

© 2008 West Legal Studies in Business A Division of Thomson Learning 13  Contracts contrary to public policy are void.  Contracts in Restraint of Trade: Covenants Not to Compete in Sale of Ongoing Business. Covenants Not to Compete in Employment Contracts (valid if reasonable limits). CASE 8.1 Thibodeaux v. Comcast Corp. (2006). Contracts Contrary to Public Policy

© 2008 West Legal Studies in Business A Division of Thomson Learning 14 Contracts Contrary to Public Policy  Exculpatory Agreements: Release a party in the event of injuryor damages, Regardless of who is at fault. Eva's in rental agreements are generally unenforceable when contracts are in the “public interest” (e.g., commercial spaces, public transportation, maybe even schools).

© 2008 West Legal Studies in Business A Division of Thomson Learning 15 Unconscionable Contract

© 2008 West Legal Studies in Business A Division of Thomson Learning 16 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.

© 2008 West Legal Studies in Business A Division of Thomson Learning 17 Mistakes

© 2008 West Legal Studies in Business A Division of Thomson Learning 18 Mistakes  Mistake of Value (or Quality). 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.

© 2008 West Legal Studies in Business A Division of Thomson Learning 19 Mistakes  Bilateral Mistakes—if both are mistaken either one can cancel the contract. CASE 8.2 Roberts v. Century Contractors, Inc. (2004).

© 2008 West Legal Studies in Business A Division of Thomson Learning 20 Fraudulent Misrepresentation  Innocent party can cancel the contract.  Plaintiff must show: Misrepresentation of a material fact (not opinion) by conduct, silence or words. Intent to deceive. Innocent party must justifiably rely on the misrepresentation. Plaintiff must have suffered a legal injury.

© 2008 West Legal Studies in Business A Division of Thomson Learning 21 Undue Influence & Duress  Undue Influence. 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.

© 2008 West Legal Studies in Business A Division of Thomson Learning 22 Statute of Frauds  Requires certain contracts to be in writing and signed to be enforceable. A contract involving any interest in land. A contract that, by its own terms, cannot be performed within 1 year of execution. 

© 2008 West Legal Studies in Business A Division of Thomson Learning 23 ‘One Year Rule’

© 2008 West Legal Studies in Business A Division of Thomson Learning 24 Statute of Frauds  Collateral promises to answer for the debt of another (exception: “main purpose” rule).  Prenuptial agreements.  Contracts for sale of goods over $500.  Exceptions: Partial performance, detrimental reliance. CASE 8.3 School-Link Technologies, Inc. v. Applied Resources, Inc. (2007). Promissory Estoppel.

© 2008 West Legal Studies in Business A Division of Thomson Learning 25 Statute of Frauds-Sufficiency  Sufficiency of the Writing. Any confirmation. 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 Defendant).

© 2008 West Legal Studies in Business A Division of Thomson Learning 26 Statute of Frauds