1. Capacity and Legality BA 18 CHAPTER 11

2. © 2000. West Legal Studies. Chapter 122 CONTRACTLAW CONTRACT (Written Verbal Implied Assumed) RESPONSIBILITIES OF ALL PARTIES RISK REQUIREMENTS AND ENFORCEMENT

3. © 2000. West Legal Studies. Chapter 123 CONTRACTLAW CONTRACT (Written Verbal Implied Assumed) RESPONSIBILITIES OF ALL PARTIES RISK REQUIREMENTS AND ENFORCEMENT

4. Review of Contracts

5. © 2000. West Legal Studies. Chapter 125 Classifications of Contracts: Give an example of each Bilateral and Unilateral Bilateral and Unilateral QuickQuizQuickQuiz Voidable, Unenforceable, Valid, Void Voidable, Unenforceable, Valid, Void Executed and Executory Executed and Executory Formal and Informal Formal and Informal Express and Implied Express and Implied Quasi- contracts Quasi- contracts CONTRACTS

6. © 2000. West Legal Studies. Chapter 126 Termination of an Offer Ê Termination by Acts of the Parties Ê Termination by Acts of the Parties Revocation by Offeror Revocation by Offeror Rejection by Offeree Rejection by Offeree Counteroffer by Offeree Counteroffer by Offeree

7. © 2000. West Legal Studies. Chapter 127 Termination of an Offer Chap. 9 Destruction of Subject Matter Destruction of Subject Matter Death or Incompetency Death or Incompetency Supervening Illegality Supervening Illegality Lapse of Time Lapse of Time Ë Termination by Operation of the Law Ë Termination by Operation of the Law

8. Legal Capacity and other Issues

9. © 2000. West Legal Studies. Chapter 129 LEGAL CAPACITY For a contract to be considered valid and enforceable, the parties must have the legal ability to bind themselves to the agreement. For a contract to be considered valid and enforceable, the parties must have the legal ability to bind themselves to the agreement. Incapacity is the exception, not the rule. Incapacity is the exception, not the rule. Burden of proof regarding incapacity falls on the party raising it as a defense to enforce the contract or as basis for rescission of the contract. Burden of proof regarding incapacity falls on the party raising it as a defense to enforce the contract or as basis for rescission of the contract.

10. © 2000. West Legal Studies. Chapter 1210 LEGAL CAPACITY Law determines contractual capacity by looking at the relative bargain power of the parties. Law determines contractual capacity by looking at the relative bargain power of the parties. Issues of contractual capacity can arise if contract involves minors, persons lacking mental capacity, aliens, convicts, and in some states-married women. Issues of contractual capacity can arise if contract involves minors, persons lacking mental capacity, aliens, convicts, and in some states-married women. Contracts made by these people may be absolutely void, voidable (the insane), or valid (if lucid when contract was formed). Contracts made by these people may be absolutely void, voidable (the insane), or valid (if lucid when contract was formed).

11. © 2000. West Legal Studies. Chapter 1211 MINORS Most states no longer use common law but instead use statutory law. Most states no longer use common law but instead use statutory law.  Common Law: anyone under the age of 21.  Statutory Law: in most states those under the age of 18. Some states allow for termination of infancy status upon marriage or emancipation. Some states allow for termination of infancy status upon marriage or emancipation.  Emancipation: free from the control or power of another.

12. © 2000. West Legal Studies. Chapter 1212 MINORS Disaffirmance/Recission Disaffirmance/Recission  To protect minors in dealing with adults, the law allows minors to disaffirm (avoid) their contract.  Except in certain specialized cases.  Necessaries.  Disaffirms contract, action results in a voidable contract.  The right to disaffirm is absolute and personal to the minor.

13. © 2000. West Legal Studies. Chapter 1213 MINORS  Disaffirmance must be in total to be effective.  Minor can disaffirm either expressly (verbal or written) or implied by course of conduct.  For disaffirmance to be effective, minor must objectively manifest intent not to be bound by the contract.  Duty of Restoration: the minor must return to the adult the property or other consideration that was the object of the contract.

14. © 2000. West Legal Studies. Chapter 1214 MINORS  Rescission: ability to have the contract set aside.  Parent or other adult co-sign the contract. Misrepresentation of Age. Misrepresentation of Age.  Minor intentionally misrepresents age.  The contract can be voided anytime during age of minority or a reasonable time upon reaching the age of majority.  Power of disaffirmance, whether contract is executory or executed.

15. © 2000. West Legal Studies. Chapter 1215 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: 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:  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.

16. © 2000. West Legal Studies. Chapter 1216 Necessaries of Life Minors are obligated to pay for the necessaries of life: Minors are obligated to pay for the necessaries of life:  Food, Shelter, Clothing, Medical Services The seller’s recovery is based on the equitable doctrine of quasi-contract rather than on the contract itself. The seller’s recovery is based on the equitable doctrine of quasi-contract rather than on the contract itself.  The minor is obligated only to pay the reasonable value of the goods or services.

17. © 2000. West Legal Studies. Chapter 1217 Parent’s Liability for Their Children’s Contracts Parents owe a legal duty to provide food, clothing, shelter, and other necessaries of life for their minor children. Parents owe a legal duty to provide food, clothing, shelter, and other necessaries of life for their minor children. Parents are liable for their children’s contracts for necessaries of life if they have not adequately provided such items. Parents are liable for their children’s contracts for necessaries of life if they have not adequately provided such items. The parental duty of support terminates if a minor becomes emancipated. The parental duty of support terminates if a minor becomes emancipated.

18. © 2000. West Legal Studies. Chapter 1218 Mental Capacity

19. © 2000. West Legal Studies. Chapter 1219 INSANE PERSONS Lack the capacity to make a binding contract. Lack the capacity to make a binding contract. Person must be so mentally infirm or deranged. Person must be so mentally infirm or deranged. Lunacy, mental retardation, senility, alcohol or drug abuse are irrelevant. Lunacy, mental retardation, senility, alcohol or drug abuse are irrelevant.

20. © 2000. West Legal Studies. Chapter 1220 INSANE PERSONS Effects of Transactions by Insane Persons. Effects of Transactions by Insane Persons.  Guardian has the legal capacity to contract.  To disaffirm a contract, person must prove insanity at the time of contracting.  To determine if transaction is void, voidable or enforceable depends on facts.  Contract is absolutely void if court judges insanity.  Insane person regains sanity the person may ratify contract made during period of insanity. Wednesday, Aug. 8, 2001. Yates is accused of drowning her five children. Parnham pleaded Yates not guilty by reason of insanity.

21. © 2000. West Legal Studies. Chapter 1221 INSANE PERSONS Necessaries. Necessaries.  Law makes insane persons liable for necessaries in quasi contract.  Fewer controversies arise regarding whether medical or legal services are necessaries.

22. © 2000. West Legal Studies. Chapter 1222 INTOXICATED PERSONS Validity of a contract depends on the degree of intoxication. Validity of a contract depends on the degree of intoxication.  If intoxication limits mental capacity of the individual, contract is voidable at the option of the intoxicated person. If mental capacity is not affected, contract is valid and enforceable.

23. © 2000. West Legal Studies. Chapter 1223 Intoxicated Person A person who is under contractual incapacity because of ingestion of alcohol or drugs to the point of incompetence. 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. 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. The contract is not voidable by the other party if that party had contractual capacity.

24. Contracts Contrary to Statues

25. © 2000. West Legal Studies. Chapter 1225 STATUTE OF FRAUDS Types of Contracts covered under the statute: Types of Contracts covered under the statute:  Contracts answering for the debts of others if person defaults.  Contracts for interests in land.  Contracts not to be performed within one year of their making.  Promises of executors and administrators of estates.  Contracts made in consideration of marriage.  Contracts for sale of goods priced at $500 or more or the lease of goods for $1,000 or more.

26. © 2000. West Legal Studies. Chapter 1226 MALA IN SE AND MALA PROHIBITA BARGAINS Court distinguish between mala in se and mala prohibita. Court distinguish between mala in se and mala prohibita.  Mala in se: bargains that violate statutes because they are evil in themselves.  Mala prohibita: bargains that have been merely forbidden by statute.

27. © 2000. West Legal Studies. Chapter 1227 Car Theft? Bill’s parents decided to sell Bill’s car because it was taking up too much room in the garage. His parents sold the car for $5500.00. When Bill returned home from college, his car had been sold. Bill had clear title of the car, however, his parents had access to the pink slip. Bill’s parents decided to sell Bill’s car because it was taking up too much room in the garage. His parents sold the car for $5500.00. When Bill returned home from college, his car had been sold. Bill had clear title of the car, however, his parents had access to the pink slip. (Family dog not included..)

28. © 2000. West Legal Studies. Chapter 1228 Car Theft? Was the sale between Bill’s parents and the buyer legal? Was this a theft? Was the sale between Bill’s parents and the buyer legal? Was this a theft? Was the car sold under fraudulent terms? Was the car sold under fraudulent terms? If Bill decided that he wanted his car back, could the contract/sale be voided? If Bill decided that he wanted his car back, could the contract/sale be voided? If he didn’t want the car back, who should receive the money from the sale? If he didn’t want the car back, who should receive the money from the sale?

29. © 2000. West Legal Studies. Chapter 1229 AGREEMENTS VIOLATIVE OF STATUTES Usury Statutes: loaning money at a greater profit (or interest rate) than the law permits. (This covers all loaning institutes such as banks, credit unions, etc.) For usury to exist, there must be a loan of money for which the debtor agrees to repay the principal at a rate that exceeds the legal rate of interest. Usury Statutes: loaning money at a greater profit (or interest rate) than the law permits. (This covers all loaning institutes such as banks, credit unions, etc.) For usury to exist, there must be a loan of money for which the debtor agrees to repay the principal at a rate that exceeds the legal rate of interest.

30. © 2000. West Legal Studies. Chapter 1230 AGREEMENTS VIOLATIVE OF STATUTES Price-Fixing Agreements: generally to restrain competition so as to create a monopoly or oligopoly in order to control price fluctuations. Price-Fixing Agreements: generally to restrain competition so as to create a monopoly or oligopoly in order to control price fluctuations. Performance of Services Without a License: absence of license bargain is unenforceable. License is to protect public from unqualified persons. Performance of Services Without a License: absence of license bargain is unenforceable. License is to protect public from unqualified persons.

31. © 2000. West Legal Studies. Chapter 1231 Performance of Services Without a License Note: Some states require licensing primarily as a revenue-producing mechanism rather than as a device for protecting the health and welfare of its citizens. If the primary intent of the license requirement is to produce revenue, the lack of a license will not affect the contract between parties.

32. © 2000. West Legal Studies. Chapter 1232 AGREEMENTS VIOLATIVE OF PUBLIC POLICY Covenant Not to Compete: also called restrictive covenants, express promises that a seller of a business or an employee who leaves a company will not engage in the same or similar business or occupation for a period of time in a certain geographic area. Such bargains may or may not be legal. Let’s take a look… Covenant Not to Compete: also called restrictive covenants, express promises that a seller of a business or an employee who leaves a company will not engage in the same or similar business or occupation for a period of time in a certain geographic area. Such bargains may or may not be legal. Let’s take a look…

33. © 2000. West Legal Studies. Chapter 1233 Using a Covenant Not to Compete with a Sale of a Business Covenants not to compete that are ancillary to a legitimate sale of a business or employment contract are lawful if they are reasonable in three aspects: Covenants not to compete that are ancillary to a legitimate sale of a business or employment contract are lawful if they are reasonable in three aspects: 1. The line of business protected. 2. The geographical area protected. 3. The duration of the restriction.

34. © 2000. West Legal Studies. Chapter 1234 Rewriting Restrictive Covenants: Compete clauses are illegal if: - The sole purpose is used to curtail competition - Places an undue restraint on trade. - Violates antitrust laws. - Contains unreasonable restrictions Courts have the right to “Blue-Pencil” or “rewrite” the contract to make the covenant fair and legal to both parties.

35. © 2000. West Legal Studies. Chapter 1235 AGREEMENTS VIOLATIVE OF PUBLIC POLICY Exculpatory Clauses: Avoiding liability by excusing one’s self from another's actions. Exculpatory Clauses: Avoiding liability by excusing one’s self from another's actions.

36. © 2000. West Legal Studies. Chapter 1236 Exculpatory Clauses: Businesses often use Businesses often use exculpatory clauses as a way to avoid primary responsibility. As an example: “This garage is not responsible for stolen or missing items. Please lock your car and take all your valuables with you.”

37. © 2000. West Legal Studies. Chapter 1237

38. © 2000. West Legal Studies. Chapter 1238 EXCEPTIONS: UPHOLDING ILLEGAL AGREEMENTS Parties Not in Pari Delicto: Parties not equally at fault. Parties Not in Pari Delicto: Parties not equally at fault. Repentance: parties try and undo or rescind illegal agreement before the legal completion. Repentance: parties try and undo or rescind illegal agreement before the legal completion. Partial Illegality: unenforceable parts of the bargain that are illegal. Partial Illegality: unenforceable parts of the bargain that are illegal.

39. © 2000. West Legal Studies. Chapter 1239 Valid, Voidable, or Void? A minor who makes a contract and does not disaffirm it before her 18th birthday. A minor who makes a contract and does not disaffirm it before her 18th birthday.Valid A mentally ill person who has not been judicially declared insane. A mentally ill person who has not been judicially declared insane.Voidable An intoxicated person who contracts to charge a client with a usurious loan rate. An intoxicated person who contracts to charge a client with a usurious loan rate.Void A minor who makes a contract and does not disaffirm it before her 18th birthday. A minor who makes a contract and does not disaffirm it before her 18th birthday.Valid A mentally ill person who has not been judicially declared insane. A mentally ill person who has not been judicially declared insane.Voidable An intoxicated person who contracts to charge a client with a usurious loan rate. An intoxicated person who contracts to charge a client with a usurious loan rate.Void Chap. 12 QuestionforThoughtQuestionforThought

40. © 2000. West Legal Studies. Chapter 1240 Questions for Review: 1. What is meant by legal Capacity? 2. What is the span of the age range that minors are protected via common law? 3. What is a Duty of Restoration? 4. What are three stipulations that can render a contract void?

41. © 2000. West Legal Studies. Chapter 1241 Questions for Review: 5. What does disaffirm mean? 6. What does Ratification mean? 7. If a minor makes a contract and does not disaffirm it before her 18th birthday, the contract is ___________.

42. © 2000. West Legal Studies. Chapter 1242 THE REQUIREMENT OF REALITY OF CONSENT Law has to ascertain whether consent given by parties is real or whether the facts differ from those to which the parties have agreed. Law has to ascertain whether consent given by parties is real or whether the facts differ from those to which the parties have agreed. Law requires reality of consent as a prerequisite to form a contract. Law requires reality of consent as a prerequisite to form a contract.

43. © 2000. West Legal Studies. Chapter 1243 UNCONSCIONABILITY May signal a lack of meaningful assent to a contract. May signal a lack of meaningful assent to a contract. May justify a court’s subsequent intervention on behalf of the injured party. May justify a court’s subsequent intervention on behalf of the injured party.

44. © 2000. West Legal Studies. Chapter 1244 http://www.snopes.com/business/deals/pepsijet.asp http://www.youtube.com/watch?v=ZdackF2H7Qc

45. © 2000. West Legal Studies. Chapter 1245 Websites to View: Legal Information Institute (LII), Contract Law Materials Legal Information Institute (LII), Contract Law Materials Legal Information Institute (LII), Contract Law Materials Legal Information Institute (LII), Contract Law Materials http://wwwsecure.law.cornell.edu/topics/contr acts.html The American Law Institute (ALI) The American Law Institute (ALI) http://www.ali.org http://www.ali.org

46. © 2000. West Legal Studies. Chapter 1246 ON-LINE RESOURCES Sherman Antitrust Act Sherman Antitrust Act Sherman Antitrust Act Sherman Antitrust Act Clayton Act Clayton Act Clayton Act Clayton Act Federal Trade Commission Act Federal Trade Commission Act Federal Trade Commission Act Federal Trade Commission Act