Bus Law Ch 13- Contracts: Capacity and Legality

marriage contracts, contracts to enlist

2 examples of contracts that minors cannot avoid for reasons of public policy

covenants not to compete and sale of an ongoing business, covenants not to compete in employment contracts

2 exceptions to contracts in restraint of trade not being enforceable

marriage, emancipation

2 situations in which states provide for the termination of minority before reaching the age of majority

contracts in restraint of trade, unconscionable contracts or clauses

2 types of business contracts that maybe contrary to public policy

expressly or impliedly

2 ways minor can ratify contract upon reaching age of majority

minors, intoxicated persons, mentally incompetent persons

3 categories of people that contractual capacity commonly applies to

1. reasonable 2. do not violate public policy 3. do not protect parties from liability for intentional misconduct

3 factors that will lead courts to enforce exculpatory clauses. language used must not be ambiguous and parties must have been in relatively equal bargaining positions. EXs of enforceable ones exist in business like: health clubs, racetracks, amusement parks, skiing facilities, etc. b/c services are not essential and firms offering them are sometimes considered to have no relative advantage in bargaining strength and anyone contracting for services is doing so voluntarily. may also be enforced in loan documents, real estate contracts, and trust agreements

void, voidable, valid

3 option that contracts mentally incompetent people made can be

justifiable ignorance of the facts, members of protected classes, withdrawal from an illegal agreement, severable/divisible contracts, fraud/duress/undue influence

5 exceptions to general rule of illegal contracts that neither party can sue for breach or recover for performance rendered

covenants not to compete in sale of ongoing business

a contractual promise of one party to refrain from conducting business similar to that of another party (opening a new store after selling their store) for a certain period of time and within a specified geographical area

age of majority

age (18 in most states) at which a person, formerly a minor, is recognized by law as an adult and Is legally responsible for his/her actions

contract to commit a crime

any contract to perform this is in violation of a statute and is unenforceable. sometimes object or performance of contract rendered illegal after contract has been formed, and in this case, contract is considered discharged (Terminate) by law

parents

as general rule this party is not liable for contracts mad by minor acting on own. exceptions are contracts for necessaries (this party is legally required to provide)

reformation

can occur with covenants not to compete by courts if covenant is found to be unreasonable in time or geographic area. court may convert terms into reasonable ones and enforce them in revised covenant. usually only resorted to by courts when necessary to prevent undue burdens/hardships

voidable at option of minor

characteristic of contract entered into by minor, subject to certain exceptions. to exercise this option a minor need only manifest/clearly show an intention no to be bound, minor avoids contract by disaffirming it

usury

charging an illegal rate of interest. almost every state has maximum rate of interest that can be charged for different types of transactions. any lender who makes loan and performs this action and thus contract made is illegal. courts usually limit the interest rate to lawful maximum. in some states lender can recover principal amount of loan but no interest. some situations can be exempt (corporate loans or borrowers who could not otherwise obtain loans)

exculpatory clauses

clause that releases a contractual party from liability in the event of monetary of physical injury, no matter who is at fault. often related to unconscionability. sometimes courts refuse to enforce b/c deem them unconscionable

covenant not to compete in employee contract

contract b/w an employer and employee in which the terms and conditions of employment are stated. people in upper and middle level management positions commonly agree not to work for competitors and not to start a competing business for specified period of time after terminating employment. enforceable as long as specified period of time (of restraint) is not excessive and geographic restriction is reasonable. must protect legitimate business interest and must not be any greater than necessary to protect that interest

enforceable

contract considered this if, despite intoxication,, person understood the legal consequences of the agreement

valid

contract entered into by a mentally ill person (whom court has not previously declared incompetent) may be _____ if person had capacity at the time the contract was formed. due to some people who are incompetent having lucid intervals (during such intervals they will be considered to have legal capacity to enter contract)

voidable

contract may be considered this at the option of the intoxicated person, if person was sufficiently intoxicated to lack mental capacity, even if intoxication was voluntary

adhesion contract

contract of procedural unconscionability. standard-form contract in which stronger party dictates the terms. presented on a take-it-or-leave-it basis. adhering party (buyer/borrower) has no opportunity to negotiate terms of contract. ones that unreasonably favor the drafter are unconscionable

severable/divisible contract

contract that consists of distinct parts that can be performed separately, with separate consideration provided for each part

indivisible contract

contract where complete performance by each party is essential, even if contract contains a number of seemingly separate provisions

contracts to commit immoral act, contracts to restrain trade, unconscionable contracts/clauses, exculpatory clauses, discriminatory contracts, contracts for commission of a tort

contracts (6) that are void b/c they are contrary to public policy

sabbath laws/blue laws

contracts contrary to certain states' sabbath/blue laws (selling alcohol on Sundays, more than a few women living together as brothel, etc.) will be unenforceable

contracts contrary to public policy

contracts that are not enforceable b/c of the negative impact they would have on society. includes contracts to commit immoral acts (selling a child, contract prohibiting marriage)

unjustly enriched

courts usually not concerned in case of illegal contracts if one wrongdoer is ___________ at the expense of the other. reason is belief that plaintiff who has broken law by entering into an illegal bargain should not be allowed to obtain help from the courts and justification is deterrent effect.

gambling

creation of risk for the purpose of assuming it. traditionally states have deemed contracts based on this illegal and thus void. today many states allow and regulate certain forms (horse racing, video poker machines, charity-sponsored bingo, state operated lotteries, Native American reservation gambling)

damaged goods

even if minor returns __________ the minor is entitled to disaffirm the contract and obtain a refund for the purchase price

legality

fourth requirement for a contract to be valid. contract must be formed for a legal purpose. contract is illegal if it involves doing something that is prohibited/illegal by federal or state statutory law and as such is void from outset and unenforceable

legality

fourth requirement for valid contract

sue for breach, recover for performance rendered

general rule of illegal contracts that neither party can ____________- or ________________

adult

general rule: minor can enter into any contract an ______ can

minors

group not legally bound by contract due to lacking some components of contractual capacity

ratified

how courts normally hold an executed contract if minor fails to disaffirm in within a reasonable time

legal portion

if contract is divisible into legal and illegal portions, court may enforce the ________ portion but not the illegal one, so long as the illegal portion does not affect essence of the bargain. consistent w/ basic policy of enforcing the legal intentions of the contracting parties whenever possible

voidable

if court has not previously judged person to be mentally incompetent but person was incompetent at time the contract was formed, contract is ______ at option of mentally incompetent, but not at option of other party. applies if person did not know that he/she was entering into the contract or lacked mental capacity to comprehend its nature, purpose and consequences.

void

if court has previously determined that a person is mentally incompetent and has appointed a guardian to represent that person then the contract is _______ (none exists). only guardian can enter into a binding contract on behalf of mentally incompetent

withdraw

if illegal part of a bargain has not yet been performed party rendering performance can withdraw from the contract and recover the performance of its value

ratified, disaffirmed

if minor fails to disaffirm contract before reaching age of majority, court generally presumes that executed (fully performed) contracts are _________ and executor (not yet fully performed by both parties) contracts are _________

members of a protected class

if statute is designed to safeguard a certain distinction of people, member of that group can enforce a contract in violation of the statute even though the other party cannot. include statutes prohibiting certain employees from working more than specified number of hours/month, statutes regulating sale of insurance

intoxicated person

if this person enters a contract it can be either voidable or valid depending on sufficiency of condition to lack mental capacity. sufficiency of condition determined by courts through looking at objective indications. difficult to void contracts claiming this

emancipation

in regard to minors, the act of being freed from parental control. child's parent/legal guardian relinquishes legal right to exercise control over child

contracts

in this area parents are not generally liable and that is why they are sometimes required to sign alongside minor.. exception is with necessaries

procedural unconscionability

involves inconspicuous print, unintelligible language (legalese), or lack of an opportunity to read the contract or ask questions about its meaning. usually arises when party's lack of knowledge or understanding of contract deprive him/her of any meaningful choice. can also occur where there is a disparity in bargaining power b/w two parties' powers and weaker party's consent is not voluntary. situation often involves adhesion contract

contracts in restraint of trade

known as anticompetitive agreements are unenforceable b/c they are contrary to public policy. typically violates state antitrust laws. exception when restraint is reasonable and ancillary (secondary) part of contract

in pari delicto

language to indicate that in most illegal contracts, both parties are considered to be equally at fault.

torts, parents

minors are personally liable for own __________. liability can be imposed on ______________ for children's negligent acts when acts are result of their negligence

restore, damage, depreciation

more states place additional duty on minor to ________ the adult party to position she or he held before contract was made. may hold minor responsible for _______ and __________ of goods that minor used prior to disaffirmance (must pay difference b/w original and residual value)

public policy

most courts view exculpatory clauses with disfavor especially when in rental agreements for commercial property b/c usually held contrary to _____________ and these clauses almost always unenforceable in residential property leases. usually hold that exculpatory clauses in employment context are against _____________. employers cannot enforce exculpatory clauses to avoid liability for work related injuries in contracts w/ employees or independent contractors

return

most states hold that minor need only _____ the goods/other consideration subject to the contract, provided goods are in minor's possession or control.

necessaries

necessities required for life, such as food, shelter, clothing, and medical attention. what goods could qualify as this for one minor may not be qualified as this for another minor depending on the minor's customary standard of living

liberty of contract

not absolute. meaning not all people can make legally binding contracts at all times

substantive unconscionability

occurs hen contracts or portion of contracts are oppressive or overly harsh. courts generally focus on provisions that deprive one party of the benefits of the agreement or leave that party w/out remedy for nonperformance by the other. can arise in wide variety of business contexts. situations of this are unconscionable where contract clause gives business entity unrestricted access to courts but requires other party to arbitrate any dispute with firm. or contracts drafted by cell providers and insurance companies that have included provisions that were overly harsh/one-sided

justifiable ignorance of the facts

occurs when one of the parties to a contract has no reason to know that the contract is illegal and this is relatively innocent. that party can recover any benefits conferred in a partially executed contract, court will not enforce contract but will allow parties to return to original positions. some courts allow innocent party who has fully performed under a contract to enforce the contract against the guilty party

express

ratification that occurs when individual, on reaching age of majority, states orally or in writing that she/he intends to be bound by the contract

implied

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

licensing statutes

states require members of certain professions to have licenses. some obtained only after extensive schooling and examinations which indicate to public that special skill has been acquired others only require good moral character and fee to gain license. purpose of these is depending factor on whether contract with an unlicensed person is legal and enforceable. if purpose is to protect public from unauthorized professionals, usually illegal. if purpose is raise government revenues contract may be enforced

ratification

the acceptance or confirmation of an act or agreement that gives legal force to an obligation that previously was not enforceable. accepting and giving legal force to an obligation.

disaffirmance

the legal avoidance, or setting aside, of a contractual obligation. minor can exercise this by expressing through words or conduct his or her intent not to be bound by contract. must apply to entire contract. minors can avoid a contract by disaffirming (EX: liability waivers, normally enforceable, included)

enforcement problems

these exist b/c laws governing enforceability of covenants to compete vary from state to state. CA prohibits enforcement of all covenants not to compete. in TX covenant not to compete is unenforceable if unless employee has received some benefit in return for signing noncompete agreement

contractual capacity

third requirement for valid contract. the capacity required by the law for a party who enters a contract to be bound by that contract. defined as the legal ability to enter into a contractual relationship, which courts generally presume this exists

procedural, substantive

two ways contracts can be unconscionable

illegal contract

type of contract that is considered void (deemed never to have existed and courts will not aid either party). if contract is executory, neither party can enforce it. if it has been executed, neither party can recover damages

contracts to commit a crime, usury, gambling, licensing statutes

types of contracts that deal with contracts contrary to statute

misrepresented age

usually if minors do this they can still disaffirm contracts, but growing number of states have enacted laws to prohibit disaffirmance in such situations. some states prohibit disaffirmance when minors commit this while engaged in business as adults

unconscionable (contract or clause)

what bargains are deemed if they are so oppressive that courts relieve innocent parties of all of their duties. considered unscrupulous or grossly unfair as to be "void of conscious". contract o clause that is void on basis of public policy b/c one party was forced to accept terms that are unfairly burdensome and that unfairly benefit the other party

anytime during minority or reasonable time after minor reaches age of majority

when a minor can disaffirm a contract. second component varies

necessaries

when contract is for this good parents are liable for contracts made by their minor children

necessaries

when minor enters into a contract for these types of goods, they may disaffirm but they remain liable for the reasonable value of the goods

fraud, duress, or undue influence

when one party uses any of these to induce the other party to enter into an agreement, the second party will be allowed to recover for the performance of its value.

public policy, misrepresenting age, necessaries

when these are involved there is exception to minor's right to disaffirm