Capacity and Legality BA 18 CHAPTER 11

1. Capacity and LegalityBA 18CHAPTER 11

2. CONTRACT LAW CONTRACT (Written Verbal Implied Assumed) RESPONSIBILITIES OF ALL PARTIES REQUIREMENTS AND ENFORCEMENT RISK Chapter 12

3. CONTRACT LAW CONTRACT (Written Verbal Implied Assumed) RESPONSIBILITIES OF ALL PARTIES REQUIREMENTS AND ENFORCEMENT RISK Chapter 12

4. Review of Contracts

5. Quick Quiz Classifications of Contracts: Give an example of each Bilateral and Unilateral Formal and Informal CONTRACTS Express and Implied Executed and Executory Quasi- contracts Voidable, Unenforceable, Valid, Void Chapter 12

6. Termination of an Offer • Termination • by Acts of the • Parties Revocation by Offeror Rejection by Offeree Counteroffer by Offeree Chapter 12

7. Chap. 9 Termination of an Offer Destruction of Subject Matter Lapse of Time • Termination • by Operation • of the Law Death or Incompetency Supervening Illegality Chapter 12

8. Legal Capacity and other Issues

9. LEGAL CAPACITY • 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. • 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. Chapter 12

10. LEGAL CAPACITY • 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. • Contracts made by these people may be absolutely void, voidable (the insane), or valid (if lucid when contract was formed). Chapter 12

11. MINORS • 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. • Emancipation: free from the control or power of another. Chapter 12

12. MINORS • 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. Chapter 12

13. 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. Chapter 12

14. MINORS • Rescission: ability to have the contract set aside. • Parent or other adult co-sign the contract. • 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. Chapter 12

15. 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: • 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. Chapter 12

16. 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 minor is obligated only to pay the reasonable value of the goods or services. Chapter 12

17. 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 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. Chapter 12

18. Mental Capacity Chapter 12

19. INSANE PERSONS • Lack the capacity to make a binding contract. • Person must be so mentally infirm or deranged. • Lunacy, mental retardation, senility, alcohol or drug abuse are irrelevant. Chapter 12

20. Wednesday, Aug. 8, 2001. Yates is accused of drowning her five children. Parnham pleaded Yates not guilty by reason of insanity. 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. Chapter 12

21. INSANE PERSONS • Necessaries. • Law makes insane persons liable for necessaries in quasi contract. • Fewer controversies arise regarding whether medical or legal services are necessaries. Chapter 12

22. INTOXICATED PERSONS • 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. Chapter 12

23. Intoxicated Person • 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. • The contract is not voidable by the other party if that party had contractual capacity. Chapter 12

24. Contracts Contrary to Statues

25. STATUTE OF FRAUDS • 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. Chapter 12

26. MALA IN SE AND MALA PROHIBITA BARGAINS • 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. Chapter 12

27. 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. (Family dog not included..) Chapter 12

28. Car Theft? • Was the sale between Bill’s parents and the buyer legal? Was this a theft? • Was the car sold under fraudulent terms? • 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? Chapter 12

29. 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. Chapter 12

30. 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. • Performance of Services Without a License: absence of license bargain is unenforceable. License is to protect public from unqualified persons. Chapter 12

31. 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. Chapter 12

32. 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… Chapter 12

33. 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: • The line of business protected. • The geographical area protected. • The duration of the restriction. Chapter 12

34. 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. Chapter 12

35. AGREEMENTS VIOLATIVE OF PUBLIC POLICY • Exculpatory Clauses: Avoiding liability by excusing one’s self from another's actions. Chapter 12

36. Exculpatory Clauses: • 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.” Chapter 12

37. Chapter 12

38. EXCEPTIONS: UPHOLDING ILLEGAL AGREEMENTS • Parties Not in Pari Delicto: Parties not equally at fault. • Repentance: parties try and undo or rescind illegal agreement before the legal completion. • Partial Illegality: unenforceable parts of the bargain that are illegal. Chapter 12

39. Chap. 12 Question for Thought Valid, Voidable, or Void? • 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. Voidable • An intoxicated person who contracts to charge a client with a usurious loan rate. Void Chapter 12

40. Questions for Review: • What is meant by legal Capacity? • What is the span of the age range that minors are protected via common law? • What is a Duty of Restoration? • What are three stipulations that can render a contract void? Chapter 12

41. Questions for Review: • What does disaffirm mean? • What does Ratification mean? • If a minor makes a contract and does not disaffirm it before her 18th birthday, the contract is ___________. Chapter 12

42. 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 requires reality of consent as a prerequisite to form a contract. Chapter 12

43. UNCONSCIONABILITY • May signal a lack of meaningful assent to a contract. • May justify a court’s subsequent intervention on behalf of the injured party. Chapter 12

44. http://www.snopes.com/business/deals/pepsijet.asp http://www.youtube.com/watch?v=ZdackF2H7Qc Chapter 12

45. Websites to View: • Legal Information Institute (LII), Contract Law Materials http://wwwsecure.law.cornell.edu/topics/contracts.html • The American Law Institute (ALI) http://www.ali.org Chapter 12

46. ON-LINE RESOURCES • Sherman Antitrust Act • Clayton Act • Federal Trade Commission Act Chapter 12