BLAW Chapter 12

Preexisting duty (consideration is lacking)

In most cases, a promise to do what one already has a legal duty t do does not constitute legally sufficient consideration -Goal: Prevent against extortion or "hold-up" game -Construction company enters into agreement with developer to build seven-story office builiding -After three months, construction company demands an extra 75,000 on its contract and threatens to stop working if not paid -What about unforeseen difficulties? -Construction company encounteted unforeseen rock formation- court may allow an exception if it is not part of ordinary business risk

Ratification

The acceptance or confirmation of an act or agreement that gives legal force to an obligation that previously was not enforceable - A minor who reached the age of majority can ratify a contract expressly or impliedly Express Ratification: occurs when the individual, on reaching the age of majority, states orally or in writing that he intends to be bound by the contract Implied Ratification: occurs when the minor, on reaching the age of majority, behaves in a manner inconsistent with disaffirmance

Consideration: Hamer v. Sidway

by agreeing to refrain from drinking alcohol, using tobacco, and playing billiards and cards for money until he reached the age of 21, did the grandson provide sufficient consideration to his grandfather?

Past Consideration (lacks consideration)

promises made in return for actions or events that have already taken place are unenforceable -Bargained-for exchange is missing -Ex: companies which attempt to impose a non-compete covenant upon an existing employee -Continued employment is typically not enough to satisfy consideration requirement

Forebearance

refraining from an action that you have a legal right to undertake -Not purchasing goods from another supplier (exclusivity)

Bargained-For Exchange

the basis for a bargain struck between or among the contracting parties -Distinguishes contracts from gifts -Example of a gift: -Father to son: "In consideration of the fact that your are not as wealthy as your brothers, I will pay you $5,000" -Because the son does not need to give his father something of legal value in return for his father's promise, there is no bargained-for exchange -Rather, the father has merely stated he is giving a gift to his son

Consideration

the value given in return for a promise or performance in a contractual agreement -Essential element for contract formation Broken down into two parts: 1. Something of legally sufficient value must be given in exchange for the promise 2. There must be a bargained-for exchange

Substantive Unconscionability

when contract or a provision is oppressive or overly harsh -Focus on provisions that deprive one party of the benefits of the agreement or leave the party without remedy for nonperformance by the other Ex: a contract to purchase a car that limits the buyer re. the damages he can seek while providing a much higher limit for the seller (dealership)

Unconscionable Contracts

Contract or clause that is void on basis of public policy because one party was forced to accept terms that are unfairly burdensome and unfairly benefit stronger party Substantive Unconscionability: when contract or a provision is oppressive or overly harsh -Focus on provisions that deprive one party of the benefits of the agreement or leave the party without remedy for nonperformance by the other Ex: a contract to purchase a car that limits the buyer re. the damages he can seek while providing a much higher limit for the seller (dealership)

Mentally Incompetent Persons

Contracts made by mentally incompetent persons can be void, voidable, or valid Void (not valid): if a court has previously determined that a person is mentally incompetent and has appointed a guardian to represent the person -Only the guardian can enter into a binding contract on that person's behalf Voidable: if a court has not previously judged a person to be mentally incompetent and the person did not he was entering into the contract or the person lacked the mental capacity to comprehend its nature, puerpose, and consequences -Can only be voided by the mentally incompetent person, not other party Valid: if person was competent when contract was formed -Lucid intervals: temporary periods of sufficient intelligence, judgement, and will

Exceptions to a minor's right to disaffirm

Exceptions created by state courts and legislatures -Marriage contracts -Contracts to enlist in the military -Contracts entered into by a minor engaged in business as an adult -Contracts for necessaries: basic needs such as food, clothing, shelter, and medical services

Release

a contract in which one party forfeits the right to pursue a legal claim against the other party -It prohibits any further recovery beyond the terms stated in the release Generally binding if: 1. Given in good fait 2. Stated in a signed writing (required by many states) 3. Accompanied by consideration EX: Car accident. Abby gives Bobby 3,000 as consideration for bobby releasing abby from further liability resulting from the accident; what if the car repairs costs 4200?

Rescission (lacks consideration)

a remedy where a contract is cancelled and the parties are returned to the positions they occupied before the contract was entered into. -the parties to the contract can agree to rescind -Can be done to the extent the contract is executory -If the parties enter into a new contract: It is often difficult to determine whether there was sufficient consideration given for the new contract or whether the parties had a preexisitng duty under the original contract

Intoxicated Persons

condition in which a person's normal capacity to act or think is inhibited by alcohol or some other drug -Contract entered into by an intoxicated person might be voidable at that person's option; he must return all consideration received -Must prove the intoxicated impaired his reason and judgement so severely that he did not comprehend the legal consequences of entering into the contract -Even though he voluntarily entered into it -Practiclaly speaking, courts use an objective test, so it's rare for contracts to be avoided due to intoxication

Severable Contract

contract that is divisible because it consists of distinct parts than can be performed separately, with separate consideration given for each part -Court may enforce the legal portion but not the illegal portion, so long as the illegal portion does not affect the essence of the bargain Ex: employment agreement that includes an overly broad (illegal) covenant not to compete

Covenant not to Compete

contractual promise of one party to refrain from conducting business similar to that of another party for a certain period of time and within a specified geographic area. -Within context of the sale of a company -Within context of an employment contract: Contract between employer and employee in which the terms and conditions of employment are outlined. -Must be deemed reasonable in terms of time, geography, scope -Varied enforcement: in california

Promissory Estoppel

doctrine that can be used to enforce a promise when the promisee has justifiably relied on it and when justice will be better served by enforcing the promise -Also known as "detrimental reliance" -Allows a party to recover on a promise even though that promise was made without consideration -A promise may be enforced even though consideration was not given, an otherwise unenforceable promise was made and relied on -As a results, promisor cant argue lack of consideration as a defense -Similar to quasi contract in some ways -Court seeks to impose fairness EXAMPLE: promises made by employers when recruiting

Withdrawal from an Illegal Agreement

if the illegal part of a bargain has not yet been performed, the party rendering performance can withdraw from the contract and recover the performance of its value Ex: after (illegally) placing a 1,000 bet on a boxing match with a bookie, you can withdraw before receiving the payout (which is the illegal part of the agreement)

Express Ratification

occurs when the individual, on reaching the age of majority, states orally or in writing that he intends to be bound by the contract -Courts generally presume an executed contract (fully performed by both parties) was ratified, while an executory contract is normally considered to be disaffirmed.

Implied ratification

occurs when the minor, on reaching the age of majority, behaves in a manner inconsistent with disaffirmance

Fraud, Duress, or Undue Influence

often, one party to an illegal contract is more at fault than the other party -When one party uses fraud, duress, or undue influence to induce the other party to enter into an agreement, the second party will be allowed to recover for the performance or its value.

Legally Sufficient Value

something of value in the eyes of the law; may consist of any of these: 1. A promise to do something that you otherwise have no prior legal duty to do -To pay a supplier upon receiving goods 2. Performance of an action that you are otherwise not obligated to undertake -Provide accounting services -Crossing the Royal Gorge bridge (bilateral contract) 3. Forebearance: refraining from an action that you have a legal right to undertake -Not purchasing goods from another supplier (exclusivity)

Members of protected classes

when a statute protects a certain class of people, a member of that class can enforce an illegal contract even though other party cannot Ex: statutes restrict working hours of flight attendants and pilots; if they are required to work more than the maximum, they can recover for those extra hours of working Ex: if an insurance company violates a statute when selling insurance, the purchaser of coverage can still enforce the policy and recover from the insurer.

Justifiable ignorance of the facts

when one party has no reason to know that the contract is illegal, that party can often recover any benefits given up in a partially executed contract -> restores party to original position Ex: trucking company can still collect its fees even though it has transported illegal goods (the shipment of those goods is illegal)

Illusory Promise (Lacks consideration)

when promisor has not definitely promised to do anything even though it appears he or she has made a promise (like an illusion) -Terms of contract express such uncertainty of performance -EX: CEO says to employees "All of you have worked hard, and if profits remain high, a 10% bonus at the end of the year will be given, if management thinks it is warranted" -Performance depends solely on the discretion of the management -No Bargained-for exchange

Elements of Promissory Estoppel

1. There must be a clear and definite promise 2. Promisor should have expected promisee would rely on the promise 3. Promisee reasonably relied on the promise by acting or refraining from some act 4. Promisee's reliance was definite and resulted in substantial detriment 5. Enforcement of that promise is necessary to avoid injustice

Settlement of Claims

Accord and Satisfaction: a common means of settling a disputed claim, whereby a debtor offers to pay a lesser amount than creditor purports to be owed -It's important to understand the nature of consideration given -Typically occurs when the amount of debt is in dispute

Contractual Capacity: Minors

Age of Majority: 18 years old is the cutoff in most states General Rule: A minor can enter into any contract an adult can provided that the contract is one not prohibited by law for minors -Voidable at the option of that minor, subject to certain exceptions -To avoid a contract, a minor only needs to clearly show an intention not to be bound by it

Accord

Agreement under which one party promises to give or perform, and the other party to accept it, in satisfaction of a claim something different from what the parties originally agreed

When Exculpatory Clause is enforced

Can be enforced: -Those that limit but do not release a party from liability, are not ambiguous, and do not claim to protect parties from liabilities for intentional misconduct- and involve non-essential services -Health clubs, race tracks, amusement parks, ski resorts -People contract for these services voluntarily

Contractual Capacity

Capacity required by the law for a party who enters into a contract to be bound by that contract -What it really means: the legal ability to enter into a contractual relationship Analyzed in respect to: Minors, intoxicated persons, mentally incompetent persons

Contracts Contrary to Public Policy (Business)

Constraints in restraint of trade -Strong public policy favoring competition in the economy -Mergers often violate public policy and antitrust law Covenant not to compete

Contracts Contrary to Public Policy

Contract is not eneforceable because of the negative impact it would have on society -Father offers young man 50,000 not to marry his daughter -If young man, accepts-> no contract is formed because its contrary to public policy -Public policy encourages marriage

The effect of illegality

General Rule: neither party to an illegal bargain can sue for breach and neither party can recover performance rendered Exception to that general rule: -Justifiable ignorance of facts: when one party has no reason to know that the contract is illegal, that party can often recover any benefits given up in a partially executed contract -> restores party to original position Ex: trucking company can still collect its fees even though it has transported illegal goods (the shipment of those goods is illegal)

Parent's Liability

General Rule: parents are not liable for the contracts entered into by minor children acting on their own, except contracts for necessaries, which the parents are legally required to provide -Businesses ordinarily require parents to co-sign any contract entered into with a minor -Parents then become personally obligated to perform the conditions of the contract, even if their child avoids liability

A minor's obligations to disaffirmance

Increasing number of states impose obligation on disaffirming minors to restore adults to pre-contract position

Satisfaction

Performance (usually payment) which takes place after the accord is executed.

Voidable

if a court has not previously judged a person to be mentally incompetent and the person did not he was entering into the contract or the person lacked the mental capacity to comprehend its nature, puerpose, and consequences -Can only be voided by the mentally incompetent person, not other party

Void (mentally incompetent)

if a court has previously determined that a person is mentally incompetent and has appointed a guardian to represent the person -Only the guardian can enter into a binding contract on that person's behalf

Valid

if person was competent when contract was formed -Lucid intervals: temporary periods of sufficient intelligence, judgement, and will

Contracts Contrary to Statute

if the object or performance of a contract is rendered illegal by statute after the contract has been formed, the contract is considered to be discharged (made illegal) -Contracts to commit a crime -Contracts the violate usury law: maximum interest rate allowed by state law

Exculpatory Clause

A clause that releases a contractual party from liability in the event of monetary or physical injury, no matter who is at fault Not typically enforced: -residential property leases -Employment contracts which removes employer's potential liability for injuries to employees Can be enforced: -Those that limit but do not release a party from liability, are not ambiguous, and do not claim to protect parties from liabilities for intentional misconduct- and involve non-essential services -Health clubs, race tracks, amusement parks, ski resorts -People contract for these services voluntarily

Adequacy

Involves "how much" consideration is given -Measuring whether the bargain was fair Who decides that? -General Rule: courts do not typically get involved in determining adequacy as long as consideration is legally sufficient Why? Freedom of contract -The courts are not used to determine whether someone entered into a bad deal or is a bad negotiator -However, if there is a shockingly bad consideration, the courts may review because that may indicate that fraud, duress, etc. was involved in the contract formation -Symptom of a greater problem

Legality

To be enforced, contract must be formed for a legal purpose -Contract to do something prohibited under federal or state statutory law is illegal -> void and unenforceable from outset Ex: craigslist advertisement to purchase a kidney -Federal law prohibits the sale of human organs -Offer: purchase kidney for 250,000 in painitngs -Would not be enforceable

Disaffirmance

the legal avoidance, or setting aside, of a contractual obligation -To disaffirm, a minor must express, through words or conduct, his or her intent not to be bound by it -Must disaffirm the entire contract, not just part of it -Can disaffirm a contract even after the minor comes of age (18) as long as the contract was entered into as a minor -Reasonable time period required, otherwise ratification is presumed -An adult who enters into a contract with a minor cannot avoid his or her contractual duties on the same grounds -Unless the minor excersises the option to disaffirm the contract, the adult is normally bound by it