Business Law: Reality of Consent, Capacity to Contract, Illegality

Exculpatory Clause

("Release" or "Liability Waiver") a provision in a contract that purports to relieve one of the parties from tort liability

Ancillary Covenant Not to Compete

(Noncompetition Clause or "Noncomplete") a formal agreement asking former employees not to perform similar work within a designated area for a specified amount of time after leaving their original employer

An exculpatory clause is generally unenforceable when:

-It attempts to exclude an intentional tort or gross negligence -The affected activity is in the public interest, such as medical care, public transportation, or some essential service -The parties have greatly unequal bargaining power

Necessary Elements of Fraud

1. INTENTIONAL misstatement/untrue assertion of past or existing fact 2. actually relied upon 3. reliance was reasonable and justifiable

Courts will allow avoidance of a contract if the unilateral mistake:

1. meets all the elements of mutual mistakes 2. the consequences of the mistake are such that it would be unconscionable to enforce the contract OR that the other party caused or knew, or had reason to know about his mistake

What are the 3 categories of people who may not have the capacity to contract? What happens to these contracts?

1. minors 2. people suffering from mental illnesses 3. intoxicated persons The contracts become VOIDABLE

5 Contracts that are Voidable

1. misrepresentation 2. fraud 3. mistake 4. economic duress 5. undue influence

Necessary Elements of Misrepresentation

1. misstatement/untrue assertion of past or existing fact 2. actually relied upon 3. reliance was reasonable and justifiable 4. fact misstated was material

Courts will allow avoidance of a contract if the mutual mistake:

1. relates to a fact that was a basic assumption on which the contract was made 2. the fact was material 3. the person adversely affected by the mistake does not consciously bear the risk of the mistake

Minor's Obligation Upon Disaffirmance

1. return the consideration if available 2. determine if the consideration was a necessary 3. determine whether or not the minor is also liable for depreciation or destruction

General common law rule regarding the period during which a minor can disaffirm a contract:

A minor can disaffirm a contract before age of majority and up until a reasonable time after reaching the age of majority, although some states specify this period of time (i.e. 6 months) in statutes Exception: contracts for the sale of real estate cannot be disaffirmed until after majority

Public Policy

A principle that no person or government official can legally perform an act that tends to injure the public

Exceptions to hands-off policy on illegal agreements:

Exception given when it is in the public interest to do so... -Where a party has rescinded the contract prior to the doing of an illegal act, he/she may be able to get damages -Where the parties are not parti delicto (equally guilty) but, in fact, there is a very large difference in degrees of wrong-doing between them -Where one party was excusably ignorant of the illegality -Where one party was aware of the illegal purposes, but did not participate in the illegality, itself -Where the contract is divisible

Is a statement of opinion generally grounds for fraud?

Generally, no. The misrepresentation must be of a past or existing fact. Opinions, sales talk, and statements about the future do not count. The exception is where a fiduciary or expert is hired

When a minor lies about their age...

Makes no difference in some states. In others, makes him liable in tort for deceit or precludes him for asserting his minority as a claim or defense

What are some contracts that a minor CANNOT disaffirm?

Marriage contracts, alimony agreements, student loans, medical insurance contracts, entertainment contracts, etc.

Ratification by minors

Minors can ratify contracts only after he/she reaches age of majority, through any way that shows his intent to be bound by the contract (cannot later be disaffirmed)

Modern Law on Innocent and Negligent Misrepresentation

One has no duty to investigate the truth of a fact represented to him/her and will not prevent rescission unless he/she failed to comply with duty of good faith and reasonable standards of commercial dealing (GROSSLY negligent)

What happens to contracts for intoxicated persons?

Persons who are SO intoxicated that they do not understand the nature and consequences of a contract are treated as lacking capacity to contract. If the other party had reason to know he was unable to understand the contract or act in a reasonable way due to his intoxication the contract is VOIDABLE. To avoid the contract, he must disaffirm it within a reasonable time after regaining sobriety. (similar to minors)

Remedy for innocent misrepresentation

Rescission

Remedy for fraud (negligent misrepresentation)

Rescission or damages (California law and the UCC allow the injured party to select both)

Fiduciaries

Specially recognized legal relationship of trust and confidence that gives rise to special duties which include: higher duties of disclosure toward the person whose interest they are supposed to be serving and their opinion may be grounds for a fraud claim if there was no reasonable basis for the opinion ex) husband and wife, parents toward children, employee to employer, etc.

How can a minor disaffirm a contract?

Through words (oral or written), conduct, or a combination of both

Determining Mental Capacity

Unless there is prior adjudication, the courts will examine the individual's state of mind at the exact moment he entered the contract. If lucid, the contract is valid and enforceable. If not, the contract is voidable. Tests: 1. cognitive test (capable of understanding the basic nature and consequences of the contract) 2. volitional test (inability to act reasonably b/c of mental defect or illness and the other party has reason to know of his impairment)

Unconscionability

Unusually harsh, grossly unfair, or "shocks the conscience of the court"; when something is judged unconscionable, a court will refuse to allow the perpetrator of the conduct to benefit

Mentally Ill Person's Duties on Disaffirmance

Upon disaffirmance, the incapacitated person must return any consideration that remains in his possession (similar to minors)

Illegal agreements are generally considered:

VOID or unenforceable ex: courts won't give remedy for buying fake cocaine

When courts will and will not enforce ancillary covenants:

Will enforce: -If part of a greater legitimate agreement -If no greater than necessary in scope, time, and geographic area -If bears a reasonable relationship to a legitimate interest owned to the party who drafted that clause Will NOT enforce: -If it is the sole purpose of a contract -Employment contracts in California -If it does not serve public interest

Contract of Adhesion

a contract that heavily restricts one party while leaving the other free; implies inequality in bargaining power

Revenue-Raising

a means of collecting money rather than as a means of protecting the public; failing to obtain this kind of license will not preclude them from enforcing an otherwise valid contract for those services

Emancipate

a parent's waiver of his rights to control and receive the services of his minor child; same laws apply to unemancipated minors

Disaffirm

a party's exercise of his power to avoid a contract entered before the party reached the age of majority; a minor's cancellation of his contract

Tort

a private (civil) wrong against his person or his property

Deceit

a tort involving intentional misrepresentation or cheating by means of some device

Nonsolicitation Agreements

an agreement that forbids an employee from soliciting the employer's employees, clients, or customers

Confidentiality/Nondisclosure Agreements

an agreement that prevents an employee from divulging or using certain information gained during his/her employment

Misrepresentation

an assertion about a fact material to a contract that is not in accordance with the truth and upon which the party actually and justifiably relies

Mistake

an erroneous belief about some fact that exists at the time the contract was formed (knowing you are ignorant or have limited knowledge is NOT a mistake)

Voidable

capable of being made void

Economic Duress

exertion of wrongful coercion that induces another person to enter a contract (the threat must be one that law considers improper)

Nondisclosure

failure to volunteer information where there is a legal duty (b/c of contract, statute, or case law) to do so

Material

important; information that is sufficiently significant to influence an individual into acting in a certain way, such as entering into a contract

Scienter

in cases of fraud and deceipt, the word means knowledge on the part of the person making representations, at the time they are made, that they are false. In an action for deceit, scienter must be approved

Fraud

misrepresentation knowingly made (scienter) with intent to deceive

Mutual Mistake

mistake made by both parties

Unilateral Mistake

mistake made by just one of the parties

Prior Adjudication

occurs when a family member has petitioned the court to make a determination of mental incompetence of the affected person, if the court agrees, then that person's contracts from date of entry of judgement on, are VOID

Procedural Unconscioncability

refers to the unconscionability in the conditions of contract formation; results from inequalities between the parties as to age, intelligence, and relative bargaining power; meaning that both parties did not freely consent to all terms proposed; the doctrine of unconscionability permits a court to refuse to enforce a contract when it feels that the contract is unfair

Substantive Unconscionability

refers to the unconscionability in the terms of a contract; the objective terms of the contract are unfair; results when contract terms are excessively oppressive or harsh; the doctrine of unconscionability permits a court to refuse to enforce a contract when it feels the contract is unfair

Concealment

taking active steps to prevent another from learning the truth (committed by conduct)

Rescind

terminate the contract as to future transactions or to annul the contract from the beginning

Necessaries

that which is reasonably necessary for a minor's proper and suitable maintenance, in view of the income level and social position of the minor's family Examples: food, clothing, shelter, and sometimes transportation

Capacity

the ability to incur legal obligations and acquire legal rights

Ratification

the adoption or affirmance by a person of a prior act that did not bind him

An exculpatory clause is generally unenforceable UNLESS:

the clause is clearly written and readily visible

Quasi-Contract

the doctrine by which the courts imply, as a matter of law, a promise to pay the reasonable value of goods or services when the party receiving such goods or services has knowingly done so under circumstances that make it unfair to retain them without paying for them

If the disaffirming minor has purchased something from the other party that is considered to be a non-necessary:

the minor gets a full refund ** To promote the fair treatment of innocent adults, a growing number of states require that minors pay for expenses like depreciation or repair costs**

If the disaffirming minor has purchased something from the other party that is considered to be a necessary:

the minor is liable for the reasonable value of what he has actually received

Regulatory

the purpose of the legislation is to protect the public against dishonest or incompetent practitioners; state-mandatory testing or educational requirements for this type of license; because it is in the public's interest, the unlicensed person will not be able to enforce a contract for such services with another person

Improper Threats/Claim of Duress

threats to commit a tort or a crime, file an unfounded criminal or civil lawsuit, or breach a contract without justification

Adjudicate

to settle by judicial decree

Undue Influence

unfair persuasion of a person by one who stands in a legally recognized relationship of trust and confidence or has a relationship of dominance over that person

Illegality

unlawfulness by virtue of violating some legal statute