Contracts

2. 3 Contracts Introduction to Contracts The Agreement: Offer The Agreement: Acceptance Consideration Reality of Consent McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3. 3 Contracts Capacity to Contract Illegality Writing Rights of Third Parties Performance & Remedies McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

4. Capacity to Contract 14 C H E A P T R “No brilliance is need in the law. Nothing but common sense, and relatively clean fingernails.” John Mortimer

5. Learning Objectives • The meaning of capacity • The classes of persons without capacity • The rights to disaffirm or ratify • The duties of disaffirmance 14 - 5

6. Definition • A person must have the ability to give consent before he can be legally bound to an agreement, thus capacity is the ability to incur legal obligations and acquire legal rights 14 - 6

7. The Lack of Capacity • Groups lacking capacity: • Minors • Those suffering a mental disability • Those who are intoxicated • Effect -- a person who contracts without the requisite capacity may avoid the contract at his/her option 14 - 7

8. Minor’s Right to Disaffirm • Right to avoid a contract is disaffirmance • Only the minor may avoid the contract • Example of disaffirmance: • Stroupes v. The Finish Line, Inc. • Court ruled that a minor’s employment contracts, including arbitration agreements, were voidable by the minor • If minor wants to affirm the contract, adult party must perform 14 - 8

9. Details About Disaffirmance • Minors may not avoid contracts if statutory exception exists: • Marriage, educational loans, insurance • Fact that a minor is emancipated (independent from parents) does not give minor capacity to contract 14 - 9

10. Details About Disaffirmance • An exculpatory clause (e.g., liability waiver) signed by a parent does not necessarily waive the minor’s rights • See Creech v. Melnik • Minor’s power to avoid contracts does not end on day he/she reaches the age of majority, but continues for a reasonable period of time afterwards 14 - 10

11. Ratification • Ratification occurs when a person who reaches majority indicates that he/she intends to be bound by a contract made while still a minor • May be express or implied by conduct 14 - 11

12. Duties Upon Disaffirmance • Each party has duty to return to the other any consideration (money, goods) that the other has given • If the consideration given by the adult has been lost, damaged, destroyed, or depreciated in value, courts are split on whether the minor party must make restitution to the adult party 14 - 12

13. Dodson v. Shrader • Facts & Procedural History: • Dodson, age 16, bought a truck from the Shraders • Dodson drove truck until engine ruined • Dodson contacted Shraders to obtain full refund, which they refused to make • Dodson filed suit • Shraders argued for difference between present value of truck ($500) and purchase price ($4900) • Trial court found for Dodson and full refund 14 - 13

14. Dodson v. Shrader • Issue & Ruling: • Must Dodson make restitution? • Purpose of “infancy doctrine” is protect minors from their own lack of judgment • Should not work hardship on innocent merchant • “Benefit Rule” holds that, upon rescission, recovery of the full purchase price is subject to a deduction for the minor’s use of the merchandise • Reversed and remanded in favor of the Shraders 14 - 14

15. Duties Upon Disaffirmance • Disaffirming minors are required to pay reasonable value for necessities (required for survival) furnished to them • Underlying theory is quasi-contractual • Example: Young v. Weaver • Was the apartment really a necessity for Young? 14 - 15

16. Capacity & Mental Impairment • Like minors, people who suffer from a mental illness or defect are disadvantaged in their ability to protect their interests in the bargaining process, thus contract law makes their contracts void or voidable • Test: Did the person have sufficient mental capacity to understand the nature and effect of the contract? 14 - 16

17. Right to Disaffirm or Ratify • If a contract is voidable due to mental impairment, the person may: • Disaffirm the contract • Once he/she regains capacity, ratify the contract • Upon disaffirmance, consideration must be returned and the person is liable for reasonable value of any necessaries 14 - 17

18. Contracts of Intoxicated Persons • Intoxication is a ground for lack of capacity only when it is so extreme that the person is unable to understand the nature of the bargaining process • Note: courts are not sympathetic! 14 - 18

19. Test Your Knowledge • True=A, False = B • Capacity is the ability to know the details of the legal rights in a contract • Ratification is the actual signature on the written contract • Disaffirmance is the right to avoid a contract due to incapacity 14 - 19

20. Test Your Knowledge • True=A, False = B • A minor’s right to disaffirm a contract ends on the day the minor achieves the age of majority • Intoxicated persons are always allowed to disaffirm a contract • Persons with a mental incapacity may disaffirm a contract, but cannot ratify the contract 14 - 20

21. Test Your Knowledge • Multiple Choice • The “benefit rule” states that when a minor disaffirms a contract: • (a) they have no further duties • (b) recovery of the full purchase price is subject to a deduction for the minor’s use of the merchandise • (c) they have the duty to return the subject goods 14 - 21

22. Test Your Knowledge • Multiple Choice • Ted just turned 17 years old. Emancipated from his parents, Ted bought a car from CarCo. Two weeks after he bought the car, Ted damaged it. Ted returned the vehicle to CarCo asking for a full refund. CarCo must: • (a) Give Ted back the full amount • (b) Pay Ted only the present value of the car • (c) Pay Ted the purchase price less the current value of the car 14 - 22

23. Thought Question • The requirement of capacity is rooted in ancient law. Should the law continue to protect minors and intoxicated persons? Why or why not? 14 - 23