Law Ch 12: Consideration, Capacity & Legality, chapter 9 & 10 in powerpoint

Minors

- In almost all states, the age of majority for contractual purposes is eighteen years or at a minor's emancipation - A minor can enter into any contract that an adult can, provided that the contract is not one prohibited by law for minors. - A contract entered into by a minor, however, is voidable at the option of that minor, subject to certain exceptions such as, marriage contracts and contracts to enlist in the armed services.

Intoxicated Persons

- Intoxication is a condition in which a person's normal capacity to act or think is inhibited by alcohol or some other drug. - A contract entered into by an intoxicated person can be either voidable or valid: ○ Sufficiently intoxicated to lack mental capacity: the transaction may be voidable at the option of the intoxicated person (even if voluntary). ○ If the person understood the legal consequences of the agreement, the contract is enforceable (remember Lucy v. Zehmer?) Courts look at objective indications of the intoxicated person's condition.

Settlement of Claims: Accord and satisfaction

- Parties do not fully perform duties under contract and a dispute arises about who breached. ○ The parties enter into a new agreement to settle the dispute (ONLY unliquidated debt) ○ The new contract supersedes the old agreement ○ If the parties enter into an accord and satisfaction - no further claims under the old agreement ○ IN NY: if a creditor accept payment but adds "without prejudice" or "under protest" - no settlement

Promissory Estoppel

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

Hamer v. Sidway

- Uncle becomes indebted to nephew after uncle promises nephew $5,000 if he can refrain from drinking, using tobacco, swearing and playing cards or billiards for money until age 21 - Nephew fulfills promise to refrain - Nephew gives the right to receive the money to receive the money to Louisa Hamer. - Uncle Dies - Sidway, executor for the Estate of the Uncle refuses to pay Hamer - Executor argues there was no consideration given in exchange for the promise to pay $5,000 - Court disagrees and says the action of refraining from a legal right is consideration

Exceptions to Preexisting Duties

- Unforeseen Difficulties - Rescission and New Contract

settlement agreements include

- accord and satisfaction - the release - covenant not to sue

Legally Sufficient Value

1. a promise to do something that one has no prior legal duty to do 2. the performance of an action that one is otherwise not obligated to undertake 3. the refraining from an action that one has a legal right to undertake

Elements of Promissory Estoppel

1. clear and definite promise 2. the promisor should've expected that the promisee would rely on the promise 3. the promisee relied on the promise by acting/ refraining from some act 4. the promisee's reliance was definite & resulted in substantial detriment 5. enforcement of the promise is necessary to avoid injustice

Agreements That Lack Consideration

1. preexisting duty 2. past consideration 3. illusory promises 4. rescission & new contract

Good faith dispute + Unliquidated debt + Payment of an amount lesser than the amount in dispute as a settlement (in accord and satisfaction/in full payment, etc.)

= Accord and Satisfaction (unless in NY and creditor notes without prejudice/under protest)

employment contracts

A contract between an employer and an employee in which the terms and conditions of employment are stated.

release

A contract in which one party forfeits the right to pursue a legal claim against the other party. - generally binding if.. 1. made in good faith 2. release contract is in a signed writing 3. accompanied by consideration

unconscionable

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 other party.

covenant not to compete

A 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 geographical area.

reformation

A court-ordered correction of a written contract so that it reflects the true intentions of the parties.

unliquidated debt

A debt that is uncertain in amount. - acceptance of payment of the lesser sum operates as a satisfaction, or discharge, of the debt because there is valid consideration. The parties give up a legal right to contest the amount in dispute.

liquidated debt

A debt whose amount has been ascertained, fixed, agreed on, settled, or exactly determined. - accord and satisfaction cannot take place.

Unconscionability

A defense that may allow a party to potentially avoid a contract on the grounds that she suffered a grossly unfair burden that shocks the objective conscience.

NY Law: Written Promise Expressing Past Consideration

A promise in writing and signed + The consideration Is in writing, Has been given or performed, Would have been a valid consideration if it weren't past consideration = A valid contract notwithstanding the consideration being past consideration

adhesion contract

A standard-form contract in which the stronger party dictates the terms.

noncompete agreement

Agreements that restrict employees from competing with the employer following termination of employment.

covenant not to sue

An agreement to substitute a contractual obligation for some other type of legal action based on a valid claim.

Contracts in Restraint of Trade

Anticompetitive agreements are generally unenforceable because they are contrary to public policy. Typically, such contracts also violate one or more federal or state antitrust laws.

The laws governing the enforceability of covenants not to compete vary significantly from state to state.

California prohibits the enforcement of all covenants not to compete. In Texas, such a covenant will not be enforced unless the employee has received some benefit in return for signing the noncompete agreement.

Contracts Contrary to Statute

Contrary to Public Policy - Non Compete - Unconscionability - Exculpatory Clauses

Contractual Capacity

Courts generally presume the existence of contractual capacity, but in some situations, capacity is lacking or may be questionable: - A person who has been determined by a court to be mentally incompetent cannot form a legally binding contract. - In other situations, a party may have the capacity to enter into a valid contract but may also have the right to avoid liability under it. For instance, minors usually are not legally bound by contracts.

The effect of illegality - void

Exceptions (justifiable ignorance of the facts, members of protected classes, withdrawal from an illegal agreement, severable contracts, fraud, duress, or undue Influence)

Legality

For a contract to be valid and enforceable, it must be formed for a legal purpose.

Exceptions: 4. Severable, or Divisible, Contracts

If a contract is divisible into legal and illegal portions, a court may enforce the legal portion but not the illegal one, so long as the illegal portion does not affect the essence of the bargain.

Exceptions: 3. 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 or its value.

Adequacy of Consideration

In general, a court will not question the adequacy of consideration based solely on the comparative value of the things exchanged.

Instead of the above letter, assume that at Pablo's retirement dinner, the chairman of the board of directors of Xerxes Corp., in his speech, said "In view of the fact that you have been faithful to Xerxes Corp. for 30 years and have resisted efforts of our competitors to hire you away from us, the corporation promises to pay you a pension of $100,000 a year for life." Pablo stood up and said, "I accept your pension promise with gratitude." Is Xerxes Corp.'s promise enforceable by Pablo and if not, what would be necessary to make it enforceable? Explain.

Issue: Is there a valid contract? Is there valid consideration? Rule: Consideration must be of legally sufficient value and a bargained for exchange. Past consideration is no consideration. NY exception, however, validates past consideration if the promise is made in signed writing and mentions the past consideration. Application: Pablo's service is past consideration and the promise was made orally. Conclusion: No consideration and thus no valid contract.

The chairman of the board of directors of Xerxes Corp. wrote a signed letter to Pablo, the president, who is 68 years old and planned to retire at the end of the year. "The corporation will pay you a pension of $100,000 a year for life if you retire as planned, and agree not to take another job in this industry." Pablo replied, "I promise to do as you wish." Two years later, Xerxes Corp. stopped the pension payments. Pablo sues Xerxes Corp. for the current installment. (a) May he recover? Explain.

Issue: Is there a valid legal contract? Rule: A contract requires agreement, consideration, legal capacity, and legality. Consideration must be of legally sufficient value. Contracts that stipulate non-compete as their main purpose are contrary to public policy unless reasonable in time and geographical limitations. Application: The chairman offered and Pablo accepted. Pablo's retirement is not consideration of legally sufficient value, because he is already obligated to retiring. Thus, this contract is all about Pablo not taking another job in the industry. Conclusion: The contract is contrary to public policy and thus void.

express ratification

Occurs when, after reaching age of majority, individual states (either orally or in writing) that he/she intends to be bound by contract entered into while a minor

Exceptions: 5. Fraud, Duress, or Undue Influence

Often, one party to an illegal contract is more at fault than the other. 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.

Amount not in dispute in an accord

Settlement requires new/additional consideration!

exceptions of consideration

Shockingly inadequate consideration can indicate that fraud, duress, or undue influence was involved.

Contracts to Commit a Crime

Sometimes rendered illegal by statute after the contract has been formed - terminated by law.

implied ratification

Takes place when the minor, on reaching the age of majority, behaves in a manner inconsistent w dissafirmance

ratification

The act of accepting and giving legal force to an obligation that previously was not enforceable.

legality

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

In the majority of states, a creditor's acceptance of a lesser sum than the entire amount of a liquidated debt is not satisfaction, and the balance of the debt is still legally owed. The debtor has given no consideration to satisfy the obligation of paying the balance to the creditor.

The debtor has a preexisting legal obligation to pay the entire debt.

Bargained-for Exchange

The item of value must be given or promised by the promisor (offeror) in return for the promisee's promise or performance.

consideration under common law

The value given in return for a promise or performance in a contractual agreement. - something of legally sufficient value must be given in exchange for the promise & there must be a bargained- for exchange

Gambling

Traditionally, gambling contracts were deemed illegal and void. Today, many states allow certain forms of gambling (such as horse racing and video poker machines).

Acceptance of a lesser amount, and an accord and satisfaction, may occur when a debtor sends a check with language indicating that it is offered in full satisfaction of the unliquidated debt. By cashing or depositing the check, the creditor is making an implied promise to take the payment the way it is offered, in full satisfaction of the debt.

Under New York law, a creditor may avoid an accord and satisfaction when accepting a check offered in full satisfaction.

NY Law & the absence of consideration

Under some New York laws certain promises are valid and enforceable even in the absence of consideration, if they are - Made in writing - Signed by the party against whom enforcement of the promise is sought

Exceptions: 2. Members of Protected Classes

When a statute is clearly designed to protect a certain class of people, a member of that class can enforce a contract in violation of the statute even though the other party cannot.

Ordinarily, a court does not look at the fairness or equity of a contract, or the adequacy of consideration.

When bargains are highly oppressive courts may relieve innocent parties of part or all of their duties. Such bargains are deemed unconscionable because they are so unscrupulous or grossly unfair as to be "void of conscience."

Exceptions: 1. Justifiable Ignorance of the Facts

When one of the parties has no reason to know that the contract is illegal, that party can often recover any benefits conferred in a partially executed contract.Courts will not enforce the contract but will allow the parties to return to their original positions.

Accord and satisfaction

a debtor offers to pay, and a creditor accepts, a lesser amount than the creditor originally claimed was owed - a common means of settling a disputed claim, whereby a debtor offers to pay a lesser amount than the creditor purports to be owed - When parties do not fully perform duties under the contract, a dispute arises and the parties can enter a new agreement to settle the dispute. In an accord and satisfaction, a debtor offers to pay, and a creditor accepts, a lesser amount than the creditor originally claimed was owed. The accord is the agreement and satisfaction is the performance (usually payment) that takes place after the accord is executed.

Promissory Estoppel

a person who has reasonably and substantially relied on the promise of another may be able to obtain some measure of recovery - allows a party to recover on a promise even though it was made without consideration

Contracts Contrary to Public Policy

a. Contracts in Restraint of Trade (exceptions: sale of an ongoing business and employment contracts if reasonable time and geographical limitation) b. Unconscionable Contracts or Clauses (procedural/substantive) c. Exculpatory Clauses

If a creditor writes "without prejudice" or "under protest"

accepting of payment does not amount to full satisfaction.

NY Law: Written Agreement for Modification or Discharge

agreement to change or modify, or to discharge in whole or in part, any contract + in writing and signed by the party against whom it is sought to enforce = A valid contract notwithstanding the lack of consideration

accord

agreement, one party undertakes to give or perform, and the other to accept

usury

charging an illegal rate of interest

indivisible contract

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

severable/ divisible contract

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

Unforeseen Difficulties

exception to preexisting duty rule when contract duties change because of unforeseeable problems

bargained for exchange

exchange that parties engage in that leads to an enforceable contract

good faith dispute

have a deal and something happens thats not anticipated

necessaries

include whatever is reasonably needed to maintain the minor's standard of living - food, water, clothing, shelter - a minor who enters contract for necessaries may disaffirm the contract but remains liable for the reasonable value of the goods

Preexisting Duty

lacks consideration - A promise to do what one already has a legal duty to do does not constitute legally sufficient consideration.

Illusory Promises

lacks consideration - If the terms of the contract express such uncertainty of performance that the promisor has not definitely promised to do anything, the promise is said to be illusory—without consideration and invalid.

Past Consideration

lacks consideration - Promises made in return for actions or events that have already taken place are invalid. These promises lack consideration in that the element of bargained-for exchange is missing.

Past Consideration

no consideration because the bargained-for exchange element is missing

Emancipation

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

Substantive Unconscionability

oppressive or grossly unfair contractual terms - Contracts, or portions of contracts, are oppressive, one-sided, or overly harsh. - Courts generally focus on provisions that deprive one party of the benefits of the agreement or leave that party without remedy for nonperformance by the other.

satisfaction

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

pre existing duty

promise to do what one already has a legal duty to do does not constitute legally sufficient consideration

illusory promises

promisor has not definitely promised to do anything (no promise at all) - without consideration & unenforceable

forbearance

refraining from an action that one has a legal right to undertake

exculpatory clauses

release a party from liability in the event of monetary or physical injury no matter who is at fault ○ Most courts view exculpatory clauses with disfavor.

In general, an illegal contract is void

that is, the contract is deemed never to have existed, and the courts will not aid either party. If the contract is executory, neither party can enforce it. If it has been executed, neither party can recover damages.

age of majority

the age (usually 18) when a person is recognized by law as an adult and is legally responsible for his/ her actions

For accord and satisfaction to occur

the amount of the debt must be in dispute

If a covenant is found to be unreasonable in time or geographic area

the court may convert the terms into reasonable ones and then enforce the reformed covenant.

contractual capacity

the legal ability to enter into a contractual relationship - mentally incompetent, intoxicated ppl lack this

disaffirmance

the legal avoidance or setting aside of a contractual obligation - a minor must express through words or conduct, his or her intent to be bound to the contract

recession

the unmaking of a contract so as to return the parties to the positions they occupied before the contract was made

Procedural Unconscionability

unfair or irregular bargaining (terms not clear or weaker party consent not voluntary) - A party's lack of knowledge or understanding of the contract terms deprive him or her of any meaningful choice - Disparity in bargaining power between the two parties that the weaker party's consent is not voluntary (adhesion contracts).

Usury

○ A lender who makes a loan at an interest rate above the lawful maximum commits usury. ○ Although illegal, there are some exceptions such as for corporate loans and for loans for borrowers who could not otherwise get loans.

Licensing Statutes

○ All states require members of certain professions to have licenses. ○ Whether a contract with an unlicensed person is legal and enforceable depends on the purpose of the licensing statute: - Protecting the public from unauthorized practitioners: illegal and unenforceable. - Raising government revenues: may be enforced (and the unlicensed practitioner fined).

Contracts in Restraint of Trade - Exceptions

○ When the restraint is: reasonable and is an ancillary part of the contract. ○ In the course of a sale of an ongoing business ○ In employment contracts - as long as: the specified period of time is not excessive in duration, and the geographic restriction is reasonable

Courts do enforce exculpatory clauses if they are:

○ reasonable ○ do not violate public policy, and ○ do not protect parties from liability for intentional misconduct. ● In addition, the language used must not be ambiguous, and the parties must have been in relatively equal bargaining positions.

Mentally Incompetent Persons

● Contracts made by mentally incompetent persons can be void, voidable, or valid: ○ If a court has previously determined that a person is mentally incompetent and has appointed a guardian to represent the person, any contract made by that person is void. ○ If a court has not previously judged a person to be mentally incompetent but the person was incompetent at the time the contract was formed, the contract is voidable in most states. May be valid if the person had capacity at the time the contract was formed (such as during lucid intervals).

Minors-Disaffirmance of the contract

● To disaffirm a contract, a minor must express his or her intent not to be bound to the contract. The minor must disaffirm the entire contract. ● A contract can ordinarily be disaffirmed at any time during minority or for a reasonable time after the minor reaches the age of majority. ● A minor who has reached the age of majority can ratify a contract expressly or impliedly.