Contracts: Capacity, Legality, Assent, and Form

1. BUSINESS LAW TODAYEssentials 9th Ed.Roger LeRoy Miller - Institute for University Studies, Arlington, TexasGaylord A. Jentz - University of Texas at Austin, Emeritus Chapter 9 Contracts: Capacity, Legality, Assent, and Form

2. Learning Objectives • Does a minor have the capacity to enter into an enforceable contract? What does it mean to disaffirm a contract? • What is an exculpatory clause? In what circumstances might exculpatory clauses be enforced? When will they not be enforced? • In what types of situations might voluntary consent to a contract’s terms be lacking? • What are the elements of fraudulent misrepresentation? • What contracts must be in writing to be enforceable?

3. Contractual Capacity • The legal ability to enter into a contractual relationship. • Full competence. • No competence. • Limited competence.

4. Minors • In most states, a person is no longer a minor for contractual purposes at the age of 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. Disaffirmance • 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 growing number of 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.

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). • Contracts Contrary to Statute. • Contracts to commit a crime. • Usury. • Gambling. • Licensing Statutes.

14. Contracts in Restraint of Trade • Covenants not to Compete and the Sale of an Ongoing Business. • Covenants Not to Compete in Employment Contracts are legal as long as the duration and geographic limits are reasonable. • CASE 9.1Comedy Club, Inc. v. Improv West Associates (2009). Covenant not to compete for 14 years covering 48 states was too broad and therefore invalid.

15. Unconscionable Contracts • Procedural Unconsionability: adhesion contracts. • Substantive Unconsionability: when terms of contract are oppressive or overly harsh.

16. Unconscionable Contracts

17. Exculpatory Clauses • Release a party from liability in the event of monetary or physical injury, no matter who is at fault. Courts generally view these clauses with disfavor.

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

19. Voluntary Consent: Mistakes

20. Mistakes • Mistake of Value (or Quality). • Contract is enforceable. • Unilateral Mistake (of Fact). • 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.

21. Mistakes • Bilateral (Mutual) Mistakes—if both are mistaken, either one can cancel the contract. • CASE 9.2Inkel v. Pride Chevrolet-Pontiac, Inc. (2008). For mutual mistake to occur, both parties must have been mistaken about a material fact. This was a matter of fact for a jury.

22. Fraudulent Misrepresentation • Contract is voidable by innocent party. Injured party must show: • Misrepresentation of a material fact (not opinion) by conduct, of law, silence, or words. Opinion is not fact (unless it is an expert opinion). • CASE 9.3Rosenweig v. Givens (2009). Whether fraud was committed in the context of a fiduciary relationship between the parties was a question of fact for a jury.

23. Fraudulent Misrepresentation • Injured party must show (cont’d): • Intent to deceive. Also known as “scienter.” • Innocent party must have justifiably relied on the misrepresentation. • Plaintiff must have suffered a legal injury.

24. 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.

25. Form: Statute of Frauds

26. Statute of Frauds—Writing Requirement • Requires certain contracts to be in writing and signed to be enforceable, as follows: • Interest in Land: A contract involving an interest in land. Includes sales, fixtures, leases, mortgages, and easements. • One Year Rule: A contract that by its terms cannot be performed within 1 year of execution. 

27. ‘One Year Rule’

28. Statute of Frauds • Collateral Promises: answer for the debt of another. • Contracts with Primary vs. Secondary Obligations. Only secondary obligations must be in writing. • Exception – “Main Purpose” Rule: guarantor seeks to secure personal benefit. • Promises Made in Consideration of Marriage. • Unilateral promise for money or property must be in writing.

29. Statute of Frauds • Contracts for the Sale of Goods over $500 must be in writing. • Exceptions: • Partial performance, detrimental reliance.

30. Statute of Frauds--Exceptions • Exceptions to Statute of Frauds: • Admissions by party against whom enforcement is sought. • Promissory Estoppel (or Detrimental Reliance). • Special UCC Exceptions. • Oral contracts for sale of customized goods may be enforced. • Oral contracts between merchants may be enforced.

31. Statute of Frauds—Sufficiency of the Writing • What Constitutes a Writing? • Written contract(s) or memorandum(s) (paper or electronic) SIGNED by the party against whom enforcement is sought (typically the defendant in the case). • Documents can be “incorporated” into each other. • What Must be Contained in the Writing? • Essential terms only. • Must name parties. • Be signed by party against whom enforcement is sought (usually the Defendant). Proving an “e-signature” is a matter for trial.