CHAPTER 8 Capacity, Legality, Assent, and Form

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

2. Learning Objectives • 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. 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. 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. 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. Minor’s Obligation on Disaffirmance • 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.

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. 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. 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. Parent’s Liability • 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.

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. 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. 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. Contracts Contrary to Statute • Usury. • Gambling. • Sabbath Laws. • Licensing Statutes. • Contracts to Commit a Crime.

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

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. 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. 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. 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.