Chapter 16: Capacity and Legality

Parents' liability for their children's contracts, Necessaries, and torts

-As a general rule, parents are not liable for contracts entered into by their minor children. -Parents do, however, have the legal duty to provide their children with the basic necessities of life, such as food, clothing, and shelter. -In most states, minors, not their parents, are liable for a minor's personal torts.

Exceptions to Minor's Right to Disaffirm a contract

-contract for necessaries -Ratification (expressed or implied)

Contracts that violate State and Federal Statutes

1- Agreements to commit a crime or tort are illegal in all states 2- Agreements made for the purpose of protecting the public's health, safety, or welfare by a party unlicensed to do so are typically illegal in all states. 3- Agreements regarding usurious loans may be illegal in some states. 4- Agreements regarding gambling are illegal in most states. 5- Agreements that violate Sabbath or Sunday laws are illegal in some states.

Exceptions to an illegal agreement

1- a member of a protected class is party to an agreement that contradicts a statute intended to protect the specific class. 2- when justifiable ignorance of facts leaves one party unaware of a provision of the agreement that would make it illegal 3- when one of the parties withdraws form an illegal agreement. The key to any recovery is that the party must have withdrawn before any illegality occurred.

Unconscionable Contract or Clause

A contract or clause that is void on the basis of public policy because one party was forced to accept terms that are unfairly burdensome and that unfairly benefit the stronger party.

Disaffirmance of the contract

Because their contracts are voidable, minors have the right, until a reasonable time after reaching the age of majority, to disaffirm or void their contract.

Ratification

Can be express or implied 1- Express ratification: occurs when, after reaching the age of majority, the person states orally or in writing that he or she intends to be bound by the contract entered into a s a minor. 2- An implied ratification: occurs when the former minor takes some action after reaching the age of majority consistent with the intent to ratify the contract.

contract for necessaries

Contracts that supply minor with basic necessities of life -Examples: food, clothing, shelter, basic medical services

Contracts in Restraint of Trade

Contracts that tend to reduce competition for the provision of goods or services in a market

Effect of Illegal Agreement

General Rule: When an agreement is illegal, the contract is void

Legal principle used by the courts in illegal contracts

If the court can sever the illegal part of a contract from the legal part, it will generally do so and enforce only the legal part; if the contract is indivisible, then it generally will be unenforceable.

Capacity

Is the third element of a legally binding contract. A person who has legal capacity has the mental ability to understand his or her rights and obligations under a contract and therefore presumably to comply with the terms.

Intoxicated Persons

Most states follow the Restatement of Contracts, Section 16, which provides that contracts of an intoxicated person are voidable if the other party had reason to know that intoxication rendered the person unable to understand the nature and consequences of the transaction or unable to act in a reasonable manner in relation to the transaction.

Minors

One of the oldest limitations on capacity is the fact that minors may enter into only voidable contracts. A minor is someone under the age of 18. In most states, however, a person is given full legal capacity to enter into contracts when he or she becomes emancipated before the age of the majority.

Mentally Incapacitated Persons

Persons suffering from a mental illness/deficiency may have full, limited, or no legal capacity to enter into a binding contract, depending on the extent and nature of their deficiency

usury law

Sets the maximum amount of interest that can be charged for a loan

Legality

The contract's purpose must be to accomplish some goal that is legal and not against public policy.

Severable contracts (divisible contracts)

a contract that contains multiple parts that can each be performed separately and for which separate consideration not likely to enforce the remaining portions.

In pari delicto

a situation in which both parties are equally at fault in an illegal contract

Covenants not to compete

an agreement in which one party agrees not to compete directly with the business of the other party; may be limited by geography or length of time

adhesion contract

an agreement presented on a take-it-or-leave-it basis or as the only chance the presented party will have to enter into it

Procedural Unconscionability

describes conditions that impair one party's understanding of a contract, as well as the integration of terms into a contract

Sabbath laws

limit the types of business activities in which parties can legally engage on Sundays

Emancipation

occurs when a child's parent or legal guardian relinquishes the legal right to exercise control over the child

Substantive Unconscionability

occurs when an agreement is overly harsh or lopsided

exculpatory clause

releases one of the contracting parties from all liability, regardless of who is at fault or what injury is suffered

Licensing Statute

require formal authorization to engage in certain trades, professions, or businesses. -Examples: Doctors, lawyers, plumbers, electricians, teachers and stockbrokers are all required to obtain a license before practicing.

Usury

the illegal action or practice of lending money at unreasonably high rates of interest.

Incapacity or incompetence

the possession of a mental or physical defect that prevents a natural person from being able to enter into a legally binding contract