1. © 2005 West Legal Studies in Business A Division of Thomson Learning CHAPTER 8 Capacity, Legality, Assent, and Form

2. © 2005 West Legal Studies in Business A Division of Thomson Learning 2 What are some exceptions to the rule that a minor can disaffirm (avoid) any contract?What are some exceptions to the rule that a minor can disaffirm (avoid) any contract? Does an intoxicated person have the capacity to enter into an enforceable 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?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 elements must exist for fraudulent misrepresentation to occur? What contracts must be in writing to be enforceable?What contracts must be in writing to be enforceable? Learning Objectives

3. © 2005 West Legal Studies in Business A Division of Thomson Learning 3 Contractual Capacity Contractual Capacity.Contractual Capacity. –The legal ability to enter into a contractual relationship. Full competence.Full competence. No competence.No competence. Limited competence.Limited competence. Legality.Legality. –The agreement must not call for the performance of any act that is criminal, tortious, or otherwise opposed to public policy.

4. © 2005 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.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 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.A contract entered into by a minor is voidable at the option of that minor.

5. © 2005 West Legal Studies in Business A Division of Thomson Learning 5 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.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.Minor must disaffirm the entire contract. Disaffirmance can be expressed or implied.Disaffirmance can be expressed or implied.

6. © 2005 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 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.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

7. © 2005 West Legal Studies in Business A Division of Thomson Learning 7 Exceptions to Minor’s Right to Disaffirm Misrepresentation of Age.Misrepresentation of Age. –Generally, minor can disaffirm the contract. –But some states prohibit disaffirmance and hold the minor liable. Contracts for Necessaries.Contracts for Necessaries. –Contracts for food, clothing, shelter may be disaffirmed by minor, who remains liable for the reasonable value of goods or services. –Yale Diagnostic Radiology v. Estate of Harun (2004).

8. © 2005 West Legal Studies in Business A Division of Thomson Learning 8 Exceptions to Minor’s Right to Disaffirm Insurance.Insurance. – Not viewed as necessaries, so minor can disaffirm contract and recover all premiums paid. Loans.Loans. –Seldom considered to be necessaries. –Exception: Loan to a minor for the express purpose of enabling the minor to purchase necessaries.Loan to a minor for the express purpose of enabling the minor to purchase necessaries.

9. © 2005 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.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.Executed v. Executory contracts.

10. © 2005 West Legal Studies in Business A Division of Thomson Learning 10 Contracts.Contracts. –Parents not liable (This is why parents are usually required to sign any contract made with a minor). Torts (Statutes Vary):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. Parent’s Liability

11. © 2005 West Legal Studies in Business A Division of Thomson Learning 11 Intoxicated Persons Lack of contractual capacity at the time the contract is being made.Lack of contractual capacity at the time the contract is being made. Contract can be either voidable or valid.Contract can be either voidable or valid. –Courts look at objective indications to determine if contract is voidable. If voidable:If voidable: –Person has the option to disaffirm, or –Person may ratify the contract expressly or impliedly.

12. © 2005 West Legal Studies in Business A Division of Thomson Learning 12 Mentally Incompetent Persons Void.Void. –If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed. Voidable.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.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.

13. © 2005 West Legal Studies in Business A Division of Thomson Learning 13 Legality A contract to do something prohibited by federal or state statutory law is illegal and therefore void (never existed).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.

14. © 2005 West Legal Studies in Business A Division of Thomson Learning 14 Contracts Contrary to Statute Usury.Usury. Gambling.Gambling. Sabbath Laws.Sabbath Laws. Licensing Statutes.Licensing Statutes. Contracts to Commit a Crime.Contracts to Commit a Crime.

15. © 2005 West Legal Studies in Business A Division of Thomson Learning 15 Contracts Contrary to Public Policy Contracts contrary to public policy are void.Contracts contrary to public policy are void. Unconscionable Contracts or Clauses.Unconscionable Contracts or Clauses. Procedural or Substantive Unconscionability.Procedural or Substantive Unconscionability. Exculpatory Clauses.Exculpatory Clauses. Discriminatory Contracts.Discriminatory Contracts. Contracts for the Commission of a Tort.Contracts for the Commission of a Tort.

16. © 2005 West Legal Studies in Business A Division of Thomson Learning 16 Contracts Contrary to Public Policy Contracts in Restraint of TradeContracts in Restraint of Trade –Anti-Competitive Agreements are void. Exception: Covenant not to Compete and Sale of Business.Exception: Covenant not to Compete and Sale of Business. Exception: Covenant not to Compete in Employment.Exception: Covenant not to Compete in Employment. Unconscionable Contracts/Clauses.Unconscionable Contracts/Clauses. –Exculpatory clauses. –Beaver v. Grand Prix Karting Association, Inc. (2001).

17. © 2005 West Legal Studies in Business A Division of Thomson Learning 17 Illegality: Exceptions Justifiable Ignorance of the Facts.Justifiable Ignorance of the Facts. Members of Protected Classes.Members of Protected Classes. Withdrawal from an Illegal Agreement.Withdrawal from an Illegal Agreement. Contract Illegal through Fraud, Duress, or Undue Influence.Contract Illegal through Fraud, Duress, or Undue Influence. Severable or Divisible Contracts.Severable or Divisible Contracts.

18. © 2005 West Legal Studies in Business A Division of Thomson Learning 18 Mistake Mistake of Value (or Quality).Mistake of Value (or Quality). –Contract is enforceable. Mistake of Fact.Mistake of Fact. –Unilateral Mistake of Material Fact— mistaken party does not have the right to cancel contract unless: (1) the non-mistaken party knew or should have known about the mistake, or(1) the non-mistaken party knew or should have known about the mistake, or (2) there is a clerical error.(2) there is a clerical error.

19. © 2005 West Legal Studies in Business A Division of Thomson Learning 19 Mistake Bilateral Mistakes—if both are mistaken either one can cancel the contract.Bilateral Mistakes—if both are mistaken either one can cancel the contract. –Roberts v. Century Contractors, Inc. (2004).

20. © 2005 West Legal Studies in Business A Division of Thomson Learning 20 Fraudulent Misrepresentation Innocent party can cancel the contract.Innocent party can cancel the contract. Plaintiff must show:Plaintiff must show: –Misrepresentation of a material fact (not opinion) by conduct, silence or words. –Intent to deceive. Sarvis v. Vermont State Colleges (2001).Sarvis v. Vermont State Colleges (2001). –Innocent party must justifiably rely on the misrepresentation. –Plaintiff must have suffered a legal injury.

21. © 2005 West Legal Studies in Business A Division of Thomson Learning 21 Undue Influence & Duress Undue Influence.Undue Influence. –Arises from a special relationship of trust. –A stronger party overcomes a weaker party’s free will by exerting psychological influence. Duress.Duress. –Threat of physical force or extortion. –Can serve as basis for rescission of contract. –Economic need, by itself, is not duress.

22. © 2005 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.Requires certain contracts to be in writing and signed to be enforceable. –A contract involving an interest in land. –A contract that by its terms cannot be performed within 1 year of execution. –Collateral promises to answer for the debt of another.

23. © 2005 West Legal Studies in Business A Division of Thomson Learning 23 Statute of Frauds –Prenuptial agreement. –Contracts for sale of goods over $500. Exceptions:Exceptions: –Partial performance and detrimental reliance. Sufficiency of the writing.Sufficiency of the writing. What must be contained in the writing?What must be contained in the writing? –Essential Terms: parties, subject matter, consideration and quantity.