CHAPTER 8 Capacity, Legality, Assent, and Form

1. CHAPTER 8Capacity, Legality, Assent, and Form

2. 2 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? 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 contracts must be in writing to be enforceable?

3. 3 Contractual Capacity Contractual Capacity. The legal ability to enter into a contractual relationship. Full competence. No competence. Limited competence. Legality. The agreement must not call for the performance of any act that is criminal, tortious, or otherwise opposed to public policy.

4. 4 Minors 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 contract entered into by a minor is voidable at the option of that minor.

5. 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. Minor must disaffirm the entire contract. Disaffirmance can be expressed or implied.

6. 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 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. 7 Exceptions to Minor�s Right to Disaffirm Misrepresentation of Age. Generally, minor can disaffirm the contract. But some states prohibit disaffirmance and hold the minor liable. 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. 8 Exceptions to Minor�s Right to Disaffirm Insurance. Not viewed as necessaries, so minor can disaffirm contract and recover all premiums paid. Loans. Seldom considered to be necessaries. Exception: Loan to a minor for the express purpose of enabling the minor to purchase necessaries.

9. 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. Executed v. Executory contracts.

10. 10 Contracts. Parents not liable (This is why parents are usually required to sign any contract made with a minor). 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. 11 Intoxicated Persons Lack of contractual capacity at the time the contract is being made. Contract can be either voidable or valid. Courts look at objective indications to determine if contract is voidable. If voidable: Person has the option to disaffirm, or Person may ratify the contract expressly or impliedly.

12. 12 Mentally Incompetent Persons Void. If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed. 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. 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. 13 Legality 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. 14 Contracts Contrary to Statute Usury. Gambling. Sabbath Laws. Licensing Statutes. Contracts to Commit a Crime.

15. 15 Contracts Contrary to Public Policy Contracts contrary to public policy are void. Unconscionable Contracts or Clauses. Procedural or Substantive Unconscionability. Exculpatory Clauses. Discriminatory Contracts. Contracts for the Commission of a Tort.

16. 16 Contracts Contrary to Public Policy Contracts in Restraint of Trade Anti-Competitive Agreements are void. Exception: Covenant not to Compete and Sale of Business. Exception: Covenant not to Compete in Employment. Unconscionable Contracts/Clauses. Exculpatory clauses. Beaver v. Grand Prix Karting Association, Inc. (2001).

17. 17 Illegality: Exceptions Justifiable Ignorance of the Facts. Members of Protected Classes. Withdrawal from an Illegal Agreement. Contract Illegal through Fraud, Duress, or Undue Influence. Severable or Divisible Contracts.

18. 18 Mistake Mistake of Value (or Quality). Contract is enforceable. 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 (2) there is a clerical error.

19. 19 Mistake Bilateral Mistakes�if both are mistaken either one can cancel the contract. Roberts v. Century Contractors, Inc. (2004).

20. 20 Fraudulent Misrepresentation Innocent party can cancel the contract. Plaintiff must show: Misrepresentation of a material fact (not opinion) by conduct, silence or words. Intent to deceive. Sarvis v. Vermont State Colleges (2001). Innocent party must justifiably rely on the misrepresentation. Plaintiff must have suffered a legal injury.

21. 21 Undue Influence & Duress Undue Influence. Arises from a special relationship of trust. A stronger party overcomes a weaker party�s free will by exerting psychological influence. Duress. Threat of physical force or extortion. Can serve as basis for rescission of contract. Economic need, by itself, is not duress.

22. 22 Statute of Frauds 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. 23 Statute of Frauds Prenuptial agreement. Contracts for sale of goods over $500. Exceptions: Partial performance and detrimental reliance. Sufficiency of the writing. What must be contained in the writing? Essential Terms: parties, subject matter, consideration and quantity.