Contracts: Capacity, Legality, Assent and Form

1. Contracts:Capacity, Legality, Assent and Form Chapter 9

2. Contractual Capacity • The minimum mental capacity required by law for a party who enters into a contractual agreement to be bound by it. • Common law recognizes three classes of persons who are generally not considered to have sufficient capacity to be bound by their contracts.

3. Contractual Capacity • Minors • under the age of eighteen (18) • contract is voidable at option of minor (must disaffirm) • minor is required to return consideration (what’s left of it) • cosignor or guarantor is liable on contract

4. Contracts With Minors • Parents’ Liability • As a general rule, parents are not liable for the contracts made by their minor children. • Unless parent co-signed the obligation

5. Contracts With Minors • Minor may disaffirm and avoid obligation under the contract: • Anytime up until a reasonable time after reaching majority • Minor may ratify contract upon reaching majority

6. Contractual Capacity • Mentally Impaired or Incompetent Persons • Voidable if contract is made while party is mentally incompetent. • Obligation to return consideration upon avoidance/disaffirmation. • May be ratified after becoming competent

7. Contractual Capacity • Intoxicated Persons • Voidable if contract is made while party is intoxicated. • No difference if voluntary or involuntary. • May be ratified after becoming sober.

8. Legality-Illegal Contracts • Contracts Contrary to Statute • Statutes sometimes proscribe certain types of contracts, contract terms, and/or contractual provisions.

9. Illegal Contracts • Usury Statutes • Virtually every state has a statute that sets the maximum rate of interest that can legally be charged for different types of transactions, including ordinary loans.

10. Illegal Contracts • Gambling - three elements: • Consideration • Chance • Prize

11. Illegal Contracts • Blue Laws • Some states and localities prohibit engaging in certain business activities on Sundays.

12. Illegal Contracts • Licensing Statutes • All states require that members of certain professions -- attorneys, doctors, and architects, etc. -- be licensed by the state. • Contract with unlicensed person may be unenforceable.

13. Illegal Contracts • Licensing Statutes • Some statutes are regulatory in nature • Contract with unlicensed person may be unenforceable. • Some statutes just produce revenue • Contract with unlicensed person not affected.

14. Illegal Contracts • Contracts in Restraint of Trade • Restrictive covenants are generally permitted when they are ancillary to an otherwise enforceable contract for the sale of a business or for employment.

15. Illegal Contracts • Unconscionable Contracts • Contracts that require one party, as a consequence of disproportionate bargaining power, to accept terms that are unfairly burdensome to that party and unfairly beneficial to the party with greater bargaining power.

16. Illegal Contracts Procedural Unconscionabiltiy – Lack of voluntariness due to disparity in bargaining power. (Contracts of Adhesion) Substantive Unconscionability- focus on contracts or provisions that are overly harsh.

17. Effect of Illegality • Generally the contract is void (not voidable), due to the “in pari delicto rule.” • Exceptions: -One party is relatively innocent, then that party may recover benefits (example 9.8 p.244). -Withdrawal prior to the illegal act (example 9.10). -Severable or divisible contracts (example 9.11).

18. Genuineness of Assent • A party who demonstrates that he or she did not genuinely assent to the terms of a contract may avoid the contract. • Genuine assent may be lacking due to mistake, fraudulent misrepresentation, undue influence, or duress.

19. Mistake • Unilateral Mistake • A mistake made by one of the contracting parties. • Generally, a unilateral mistake will not excuse performance of the contract unless other party knew of the mistake OR substantial mathematical error.

20. Mistake • Mutual Mistake • A mistake on the part of both contracting parties. • In this case, either party may rescind.

21. Fraud • When an innocent party consents to a contract with fraudulent terms, he or she may usually avoid the contract, because he or she did not genuinely assent to the fraudulent terms.

22. Fraud • Elements: • misrepresentation of material fact • made with the intent to deceive (scienter) • justifiable reliance • damages

23. Undue Influence and Duress • Undue Influence -- arises from relationships in which one party can influence another party to the point of overcoming the influenced party’s free will. • Duress -- forcing a party to enter into a contract because of the fear created by threats.

24. The Statute of Frauds • A statute which requires certain types of contracts to be in writing in order to be enforceable. • Some contracts considered important enough that their terms must be memorialized in writing to ensure reliable evidence of their existence and their terms

25. The Statute of Frauds • Agreements in consideration of marriage-Prenuptial agreements • Not performable within one year • Involving an interest in land • For sale of goods over $500 ($5,000 under UCC) • Collateral agreements

26. The Statute of Frauds: Exceptions • Partial Performance • Custom Orders of Goods • Acceptance of Delivery

27. The Statute of Frauds: Sufficiency of the Writing • A writing signed by the party against whom enforcement is sought. • A confirmation, invoice, sales slip, check, or fax, or any combination thereof. • Several documents which, in combination, provide the terms for an agreement.

28. Contracts: Capacity, Legality, Assent and Form End of Chapter 9