1. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Slides developed by Les Wiletzky PowerPoint Slides to Accompany ESSENTIALS OF BUSINESS AND ONLINE COMMERCE LAW 1 st Edition by Henry R. Cheeseman Chapter 8 Contracts: Capacity, Legality, Assent, and Writing Chapter 8 Contracts: Capacity, Legality, Assent, and Writing

2. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 2 Capacity (1 of 2) contractual capacity  The law presumes that the parties to a contract have the requisite contractual capacity to enter into the contract  Certain persons do not have this capacity: Minors Insane persons Intoxicated persons

3. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 3 Capacity (2 of 2)  The common law of contracts and many state statutes protect persons who lack contractual capacity from having contracts forced on them  The person asserting incapacity bears the burden of proof

4. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 4 Minors age of majority  Many states have enacted statutes that specify the age of majority  The most prevalent age of majority is 18 years of age for both males and females period of minority  Any age below the statutory age of majority is called the period of minority

5. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 5 Minors: The Infancy Doctrine (1 of 3) disaffirm cancel  A doctrine that allows minors to disaffirm (or cancel) most contracts they have entered into with adults  Doctrine based on public policy that reasons that minors should be protected from unscrupulous behavior of adults

6. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 6 Minors: The Infancy Doctrine (2 of 3)  Disaffirmance  Disaffirmance – the act of a minor to rescind a contract under the infancy doctrine Disaffirmance may be done orally, in writing, or by the minor’s conduct  Competent Party’s Duty of Restitution  Competent Party’s Duty of Restitution – if the minor has transferred consideration to the competent party before disaffirming the contract, that party must place the minor in status quo

7. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 7 Minors: The Infancy Doctrine (3 of 3) Competent Party’s Duty of Restoration  If a minor has transferred money, property, or other valuables to the competent party before disaffirming the contract, that party must place the minor back into status quo Competent Party’s Duty of Restoration  If a minor has transferred money, property, or other valuables to the competent party before disaffirming the contract, that party must place the minor back into status quo Minor’s Duty of Restoration  A minor is obligated only to return the goods or property he or she has received from the adult in the condition it is in at the time of disaffirmance Minor’s Duty of Restoration  A minor is obligated only to return the goods or property he or she has received from the adult in the condition it is in at the time of disaffirmance

8. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 8 Minors: Ratification  If a minor does not disaffirm a contract either during the period of minority or within a reasonable time after reaching the age of majority: ratified The contract is considered ratified (accepted) The minor (now an adult) is bound by the contract The right to disaffirm the contract has been lost

9. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 9 Minors: Necessaries of Life necessaries of life  Minors are obligated to pay for the necessaries of life that they contract for: Food, Shelter, Clothing, Medical Services Any other items considered necessary to the maintenance of life  The minor is obligated only to pay the reasonable value of the goods or services received

10. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 10 Mentally Incompetent Persons (1 of 4)  The law protects people suffering from substantial mental incapacity from enforcement of contracts against them legally insane  To be relieved of his or her duties under a contract, the law requires a person to have been legally insane at the time of entering into the contract

11. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 11 Mentally Incompetent Persons (2 of 4)  Legal Insanity  Legal Insanity – a state of contractual incapacity as determined by law  The law has developed two standards concerning contracts of mentally incompetent persons: 1.Adjudged Insane 2.Insane, But Not Adjudged Insane

12. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 12 Mentally Incompetent Persons (3 of 4)  Adjudged Insane A person who has been adjudged insane by a proper court or administrative agency void A contract entered into by such a person is void Neither party can enforce the contract

13. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 13 Mentally Incompetent Persons (4 of 4)  Insane, But Not Adjudged Insane A person who is insane but has not been adjudged insane by a court or administrative agency voidable A contract entered into by such a person is generally voidable void Some states hold that such a contract is void

14. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 14 Intoxicated Person  A person who is under contractual incapacity because of ingestion of alcohol or drugs to the point of incompetence  Most states provide that contracts entered into by such intoxicated persons are voidable by that person  The contract is not voidable by the other party if that party had contractual capacity

15. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 15 Legality  One requirement to have an enforceable contract is that the object of the contract must be lawful void  Contracts with an illegal object are void and therefore unenforceable  There are two key categories of illegality: Contracts contrary to statutes Contracts contrary to statutes Contracts contrary to public policy Contracts contrary to public policy

16. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 16 Contracts Contrary to Statutes  Federal and state legislatures have enacted statutes that prohibit certain types of conduct  Contracts to perform an activity that is prohibited by statute are illegal contracts  Federal and state legislatures have enacted statutes that prohibit certain types of conduct  Contracts to perform an activity that is prohibited by statute are illegal contracts  Usury Laws  Gambling Statutes  Sabbath Laws  Contracts to Commit a Crime  Licensing Statutes Regulatory Statute Revenue-Raising Statute  Usury Laws  Gambling Statutes  Sabbath Laws  Contracts to Commit a Crime  Licensing Statutes Regulatory Statute Revenue-Raising Statute

17. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 17 Contracts Contrary to Public Policy  Contracts that have a negative impact on society or that interfere with the public’s safety and welfare  Such contracts are void  Contracts that have a negative impact on society or that interfere with the public’s safety and welfare  Such contracts are void  Immoral Contracts  Contracts in Restraint of Trade  Exculpatory Clauses  Covenants Not to Compete  Immoral Contracts  Contracts in Restraint of Trade  Exculpatory Clauses  Covenants Not to Compete

18. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 18 Unconscionable Contracts (1 of 2)  Some lawful contracts are so oppressive or manifestly unfair that they are unjust doctrine of unconscionability  To prevent the enforcement of such contracts, the courts have developed the equitable doctrine of unconscionability unconscionable contractcontract of adhesion  A contract found to be unconscionable under this doctrine is called an unconscionable contract, or a contract of adhesion

19. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 19 Unconscionable Contracts (2 of 2)  Elements that must be shown to prove that a contract or clause is unconscionable: The parties possessed severely unequal bargaining power The dominant party unreasonably used its unequal bargaining power The adhering party had no reasonable alternative

20. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 20 Remedies for Unconscionability  Where a contract or contract clause is found to be unconscionable, the court may do one of the following: Refuse to enforce the contract Refuse to enforce the unconscionable clause but enforce the remainder of the contract Limit the applicability of any unconscionable clause so as to avoid any unconscionable result

21. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 21 Genuineness of Assent  The requirement that a party’s assent to a contract be genuine or real  The genuineness of assent is lacking in certain cases of: Mistake Fraudulent Misrepresentation Duress Undue Influence

22. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 22 Unilateral Mistakes  Occur when only one party is mistaken about a material fact regarding the subject matter of the contract  In most cases the mistaken party will not be permitted to rescind the contract  The contract will be enforced on its terms

23. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 23 Mutual Mistakes Mutual Mistake of Fact  A mistake made by both parties concerning a material fact that is important to the subject matter of the contract  In Raffles v. Wichelhaus, the court held that a mutual mistake of fact excused performance of the contract Mutual Mistake of Fact  A mistake made by both parties concerning a material fact that is important to the subject matter of the contract  In Raffles v. Wichelhaus, the court held that a mutual mistake of fact excused performance of the contract Mutual Mistake of Value  A mistake that occurs if both parties know the object of the contract but are mistaken as to its value  The contract remains enforceable by either party because the identity of the subject matter of the contract is not at issue Mutual Mistake of Value  A mistake that occurs if both parties know the object of the contract but are mistaken as to its value  The contract remains enforceable by either party because the identity of the subject matter of the contract is not at issue

24. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 24 Fraudulent Misrepresentation When a person intentionally makes an assertion that is not in accord with the facts. fraud Also called fraud.

25. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 25 Elements of Fraud 1.The wrongdoer made a false representation of material fact 2.The wrongdoer intended to deceive the innocent party 3.The innocent party justifiably relied on the misrepresentation 4.The innocent party was injured 1.The wrongdoer made a false representation of material fact 2.The wrongdoer intended to deceive the innocent party 3.The innocent party justifiably relied on the misrepresentation 4.The innocent party was injured

26. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 26 Common Types of Fraud (1 of 2)  Fraud in the inception An innocent person is deceived as to the nature of his or her act  Fraud in the inducement The wrongdoer fraudulently induces another party to enter into a contract  Fraud by concealment The wrongdoer takes specific action to conceal a material fact from the other party

27. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 27 Common Types of Fraud (2 of 2)  Silence as misrepresentation The wrongdoer remains silent when he or she is under a legal obligation to disclose a material fact  Misrepresentation of law A professional who should know what the law is intentionally misrepresents the law to a less sophisticated party

28. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 28 Innocent Misrepresentation  Occurs when a person unintentionally makes an assertion that is not in accord with the facts  The innocent party may rescind the contract but cannot recover damages  Innocent misrepresentation is not fraud

29. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 29 Summary: Types of Misrepresentation Type of MisrepresentationSue for DamagesRescind Contract Fraud in the inceptionYes Fraud in the inducementYes Fraud by concealmentYes Silence as a misrepresentationYes Misrepresentation of lawUsually no Innocent misrepresentationNoYes Legal Consequences – Innocent Party May:

30. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 30 Undue Influence (1 of 2)  Occurs when one person takes advantage of another person’s mental, emotional, or physical weakness and unduly persuades that person to enter into a contract  The persuasion by the wrongdoer must overcome the free will of the innocent party

31. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 31 Undue Influence (2 of 2) The following elements must be shown to prove undue influence: 1.A fiduciary or confidential relationship must have existed between the parties 2.The dominant party must have unduly used his or her influence to persuade the servient party to enter into a contract

32. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 32 Duress  Occurs when one party threatens to do some wrongful act unless the other party enters into a contract  A contract entered into under duress cannot be enforced

33. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 33 Statute of Frauds Writing Requirement: Statute of Frauds Most states require the following types of contracts to be in writing: 1.Contracts involving interests in land 2.Contracts that by their own terms cannot be performed within one year 3.Collateral contracts where a person promises to answer for the debt or duty of another person 4.Contracts for the sale of goods for more than $500 5.Real estate agents’ contracts

34. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 34 Part Performance Exception  A doctrine that allows the court to order an oral contract for the sale of land or transfer of another interest in real estate to be specifically performed if it has been partially performed and performance is necessary to avoid injustice

35. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 35 Original and Guaranty Contracts DebtorCreditor Guarantor Guarantor agrees to pay the debt if the debtor fails to pay the creditor Contract No. 1 Contract No. 2 Original Contract Guaranty Contract

36. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 36 Promissory Estoppel Statute of Frauds  Equitable doctrine that prevents the application of the Statute of Frauds Statute of Frauds  It permits the enforcement of oral contracts that should otherwise be in writing under the Statute of Frauds to prevent injustice or unjust treatment

37. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 37 Sufficiency of the Writing (1 of 2)  Formality of the writing A written contract does not have to be formal or drafted by a lawyer to be enforceable Informal contracts are enforceable contracts  Required signature The party against whom enforcement of the contract is sought must have signed the contract

38. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 38 Sufficiency of the Writing (2 of 2)  Integration of several writings Several writings may be integrated to form a contract Express reference Express reference – one document incorporates another document Implied reference Implied reference – documents are physically attached by staple or by paper clip or are placed in the same envelope

39. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 39 The Parol Evidence Rule  Parol evidence  Parol evidence – any oral or written words that are outside of the four concerns of a written contract  Parol evidence rule  Parol evidence rule – provides that if a written contract is a complete integration, any prior contemporaneous oral or written statements are inadmissible as evidence to alter or contradict the terms of the written contract

40. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 40 Exceptions to the Parol Evidence Rule Parol evidence Parol evidence may be admitted in court to:  Prove mistake, fraud, misrepresentation, undue influence, or duress  Explain ambiguous language  Explain a prior course of dealing or course of performance between the parties or a usage of trade  Fill in the gaps of a contract  Correct obvious clerical or typographical errors Parol evidence Parol evidence may be admitted in court to:  Prove mistake, fraud, misrepresentation, undue influence, or duress  Explain ambiguous language  Explain a prior course of dealing or course of performance between the parties or a usage of trade  Fill in the gaps of a contract  Correct obvious clerical or typographical errors

41. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 08 - 41 Merger, or Integration, Clause parol evidence  The parties to a written contract may include a clause stipulating that the contract is a complete integration and the exclusive expression of their agreement and that parol evidence may not be introduced to explain, alter, contradict, or add to the terms of the contract parol evidence rule  This type of clause expressly reiterates the parol evidence rule