1. ELEMENTS OF CONTRACT: CAPACITY and LEGALITY

2. 5.1 CAPACITY and LEGALITY
Capacity- Legal ability to enter into a contract
Assumption that another person has the capacity to enter into a contract is called rebuttable presumption.
Law allows some people to say after the fact that they did not have the capacity to enter into a contract
The law states several types of people may have the right to get out of a contract
Minors
People with mental impairments
People under the influence of drugs or alcohol.

3. People with Mental Impairments
People with mental impairments can argue that they cannot be bound by contracts.
Mental problem must have made it impossible for the person to understand what was going on when the contract was made.
ONLY doctors can determine if someone is mentally impaired
If a person needs someone to take care of them (a guardian), then all of their contracts are void.
A contract made by a person with a mental impairment can be considered valid if the person completely knew what they were doing at the time of the contract.

4. MINORS Most of the time, minors can enter into and honor contracts.
Also allowed to get out of contracts
Considered by law to be:
Too inexperienced
Immature
Unknowledgeable
Naïve
Adults can protect themselves from deceitful minors by:
Not entering into contracts with them
Making a parent co-sign on the contract (forces the parent to take responsibility if minor backs out)

5. MINORS (cont’d)
Minor- person who has yet to reach the age of adulthood
Adulthood is 18 in most states
Interesting note- law considers people to reach a particular age at the beginning of the day before their birthday.
One second after the clock hits midnight the day before your birthday, that entire day has counted and you are now your new age.
Example- You will turn 18 on April 5th. When the clock hits midnight and one second on April 4th, you are legally considered 18.
Emancipated minor- no longer under the legal control of his or her parents
Responsible for their own contracts
Minor is automatically emancipated when he/she gets married or sets up their own household (moves out and lives on their own).
Minor may seek emancipation from the court’s by suing for emancipation.

6. INTOXICATED PERSONS
People who are under the influence of drugs or alcohol can sometimes get out of a contract
Persons claiming intoxication must have been so impaired that they did not know what they were doing when entering the contract
Decision is made by a judge or jury

7. OTHER LIMITS on CAPACITY
Some states convicts have limited capacity to contract
Aliens, citizens of other countries living in the U.S. may also have limited capacity
In wartime, foreign-born people identified as enemy aliens may be denied certain capacities.
Law makes exceptions for necessaries such as food, clothing, shelter, medical care, etc.
Judge or jury to decide what is necessary.

8. RIGHTS and DUTIES of MINORS
Contracts made by minors are voidable by the minor.
Another term of voiding a contract by a minor is disaffirming.
Disaffirm- show the intent not to live up to the contract.
Intent can be shown by action or by statement
Minors Rights:
Returning of Goods (disaffirming a sales contract)
Minors may return goods they have purchased
Must be done within a reasonable amount of time
Reasonable amount of time decided by judge or jury
Some states a fee can be charged for damaged, dirty, torn, etc. items that are returned
Minors may even disaffirm a contract after becoming an adult

9. RIGHTS and DUTIES of MINORS
Disaffirming Contracts
Minors can not disaffirm parts of a contract, it is all or nothing
After a contract is made, if an adult realizes the other party is a minor, the adult CAN NOT disaffirm the contract
Two minors enter into a contract, either one can disaffirm the contract.
Ratification of a Minor’s Contract
Ratification- agreeing to go along with a contract that could have been avoided
Can ratify by words or by actions
Can be written or oral
Minor can ratify a contract after becoming an adult
Once ratified, minor loses all privileges they had as a minor
Minor makes a payment that was due under a contract, after becoming an adult, that payment ratifies the contract.

10. RIGHTS and DUTIES of MINORS
EXCEPTIONS
Minors must pay fair value for necessaries
Most states will hold minors accountable for car insurance
Some states consider married minors as adults
Minors CAN NOT get out of military enlistment contracts
Minors as Students
Students in a school may be searched if there is reason to believe laws or school rules have been broken
Students may be restrained from printing certain matters in school sponsored newspapers

11. RIGHTS and DUTIES of PARENTS and GUARDIANS
Parents’ Rights Under the Law
Right to discipline their children
Cannot abuse their children (law called parens patriae doctrine)
Must provide children with necessaries
If minors are forced to purchase own necessaires, parents will be liable for the contract
Parent duty ends if child becomes emancipated
Parents may name guardians for their children
Two types
Guardian- act as the child’s parent
Property guardian- handle the child’s property (ends when the child becomes an adult)

12. LEGALITY Illegality can destroy an otherwise valid contract
A court will not help any party to an illegal contract
Neither party can enforce the agreement
Neither party can get help from the court
EXCEPTION: when the parties are not equally at fault, court may help the person who is less at fault get back any money or property.
If a contract cannot be divided into separate promises or different acts, then any part of that contract with an illegality makes the entire contract void.

13. AGREEMENTS THAT BREAK STATUTES
Various types of statutes
Civil and Criminal Statutes
Usury Statutes
Gambling Statutes
Sunday Statutes
Licensing Statutes
State legislatures pass laws that make some agreements illegal because they violate one of the above statutes

14. AGREEMENTS THAT BREAK STATUTES
Civil and Criminal Statues
Agreements that require one party to commit a tort or a crime are illegal
Torts- slander, libel and fraud
Agreement made that interferes with or violates a person’s rights is illegal
Usury Statutes
Usury- activity that has hidden dimension of illegality
Examples:
Contract to buy stolen goods (if the person buying the goods does not know they are stolen)
Charging more than the maximum legal interest rate (the person paying the rate does not know the rate is illegal)

15. AGREEMENTS THAT BREAK STATUTES
Gambling Statutes
Gambling is illegal in most states
Examples of Gambling
Playing cards (for money)
Betting on sporting events
Entering an office pool for money
If you win money gambling and can not collect your winnings, the court will not help you and you may even get in trouble for violating the law.
Have to be careful, some forms of gambling are legal in one state and illegal in another.

16. AGREEMENTS THAT BREAK STATUTES
Sunday Statutes
Sunday statutes are also called “Blue Laws”
Not all states have Sunday Statutes
Statute states that any agreements made on a Sunday are VOID.
Offer made on any other day but Sunday, but accepted on a Sunday is VOID
Offer made on a Sunday, but accepted on any other day is VALID (because contract is not created until it is accepted)
If agreement is made on a Sunday BUT a date other than Sunday is place on the contract, it is VOID
Many states apply these rules to legal holidays as well (ex. Christmas)

17. AGREEMENTS THAT BREAK STATUTES
Licensing Statutes
All states have statutes that require a license to do certain jobs.
License- legal document granting someone permission from the government to do a certain job. (Ex. Doctor needs a medical license)
Licenses protect people from unqualified people
Agreements with unlicensed people in a job requiring a license is illegal

18. AGREEMENTS CONTRARY to PUBLIC POLICY
Some illegal agreements break public policy, instead of statutes.
Public Policy- A legal principle that holds that nobody should be allowed to do something that harms the public.
Public Policy allows the courts to protect the public welfare when other laws do not.
Examples of Public Policy are:
Agreements that unreasonably restrain trade
Agreements not to compete
Agreements for price fixing
Agreements to defeat competitive bidding
Agreements to obstruct justice
Agreements inducing breach of duty or fraud
Agreements to give up the right to litigate or arbitrate
Agreements interfering with marriage

19. AGREEMENTS CONTRARY to PUBLIC POLICY
Agreements that Unreasonably Restrain Trade
Law protects the right to make a living
Contract cannot take away this right
Restraint of trade agreements take away someone’s ability to do business with others.
Three types of agreements that circumvent the rule
Agreement not to compete
Agreement for price fixing
Agreement to defeat competitive bidding
When a person buys a buys a business, a restrictive covenant can be added to a contract
Means the seller cannot open a business that competes with the business they just sold for a specific amount of time (courts will uphold this agreement)
If the restraint is unreasonable, contract is illegal
Promises not to compete are also found in employment contracts
Employees agree not to work for a competitor for a certain amount of time.
This is only enforceable for a reasonable amount of time.

20. AGREEMENTS CONTRARY to PUBLIC POLICY
2) Agreements for Price Fixing
Laws have been created to protect competition
Price fixing- competitors agree to set prices within certain ranges
Price fixing hurts competition and keeps prices artificially high
Price fixing can lead to being prosecuted by federal agencies
3) Agreements to defeat competitive bidding
Laws often require governments to construct public works or buy goods and services through competitive bidding
Competitors submit bids for a project, the lowest qualified bid wins the contract
Competitors agree not to bid below a certain price, they are not bidding competitively, which makes the agreement not enforceable.

21. AGREEMENTS CONTRARY to PUBLIC POLICY
Agreements to Obstruct Justice
Contracts that get in the way of delivering justice is illegal
Examples include
Protecting someone from arrest (hiding them in your house, driving them out of town, etc.)
Encouraging lawsuits
Giving false testimony
Bribing a juror
Agreements Inducing Breach of Duty or Fraud
Many people hold positions of trust and/or have a responsibility for the well-being of others (Congressmen, Senator, Public Official, etc.)
Duty is to work for the best interest of the public
Contracts that try to influence these people (bribes) for private gain is unenforceable

22. AGREEMENTS CONTRARY to PUBLIC POLICY
Agreements to Give Up the Right to Litigate or Arbitrate
Contracts MAY include clauses that limit the ability to bring a lawsuit or to arbitrate
If the clause is not fair, a court may decide it is illegal.
Agreements Interfering with Marriage
Contracts that discourage, damage, or destroy good family relationships are illegal.
Example: A contract from a father that promises to give his daughter $100,000 to never get married is void and not enforceable.