BLaw Ch 12

Exceptions to Effect of Illegality

--Innocent persons who were justifiably ignorant of the law or fact that made the contract illegal -EX: A person who purchases insurance from an unlicensed insurance company may recover insurance benefits from the unlicensed company. --Persons who were induced to enter into an illegal contract by fraud, duress, or undue influence -EX: A shop owner who pays $5,000 "protection money" to a mobster so that his store will not be burned down by the mobster can recover the $5,000. --Persons who entered into an illegal contract who withdraw before the illegal act is performed -EX: If the president of New Toy Corporation pays $10,000 to an employee of Old Toy Corporation to steal a trade secret from his employer but reconsiders and tells the employee not to do it before he has done it, the New Toy Corporation may recover the $10,000. --Persons who were less at fault than the other party for entering into the illegal contract (extremely ineffective)

Case 12.1: Ford Motor Company v Ghreiwati Auto

-2013 U.S. Dist. Lexis 159470 (2013) -United States District Court for the Eastern District of Michigan •Issue -Did the presidential executive order make the dealership contract illegal for Ford to perform? After executive order was passed, Ford filed action in US district court to prove validity of termination -Decision: The U.S. district court held that the executive order rendered the Ford-Auto dealership agreement illegal and that Ford had therefore terminated the agreement properly.

Case 12.1: Ivie v Smith

-439 S.W.3d 189 (20140 -Supreme Court of Missouri •Issue -Did Watson lack contractual capacity at the time she changed beneficiary designations and retitled property to Smith? Watson, with Alzheimer's, signed her assets to Smith; were signed to Ives before disease •Decision: The circuit court held that Watson lacked mental capacity at the time of these transactions and held that they were void. The court directed that Watson's bank accounts, retirement accounts, pension benefits and other assets go to the Ivies. The Supreme Court of Missouri affirmed the circuit court's decision.

Case 12.3: DeCormier v Harley-Davidson Motor Company Group, Inc

-446 S.W.3d 668 (2014) -Supreme Court of Missouri •Issue -Is the exculpatory clause signed by plaintiff DeCormier enforceable? DeCormier got injured but previously signed agreement -Decision: The Supreme Court of Missouri affirmed the circuit court's decision enforcing the exculpatory clause.

Ryno v Tyra

-752 S.W.2d 148, 1988 Tex. App. Lexis 1646 (Court of Appeals of Texas) -R. D. Ryno Jr. owner of an automobile dealership and Lee Tyra performed a double-or-nothing coin flip for a car worth $150k. If Ryno won the coin flip, Tyra would have to pay $250,000 for the car; if Tyra won the coin flip, he would get the car for free. The coin was flipped, and Tyra won the coin flip. Ryno said, "It's yours," and handed Tyra the keys, title, and possession to the car. Tyra drove away in the BMW. A lawsuit ensued as to the ownership of the car. -The court held that when Tyra won the coin toss and Ryno voluntarily gave the keys, title, and possession of the BMW to Tyra, this was a performed illegal gambling contract. The court left the parties where it found them: Tyra had the keys, title, and possession of the BMW; Ryno did not have either the car or payment for the car. -If when Tyra won the coin toss Ryno had refused to give the BMW to Tyra, Tyra could not have used the courts to compel Ryno to honor his wager. The court would again have left the parties where it found them. Tyra would have won the coin toss but could not obtain the car from Ryno

(Minor's) Duty of Restoration

-A minor is obligated only to return the goods or property (or the value of) he or she has received from the adult in the condition it is in at the time of disaffirmance -Example When Sherry is 17 years old (a minor) she enters into a contract to purchase an automobile costing $10,000 from Bruce, a competent adult. Bruce, who believes that Sherry is an adult and does not ask for verification of her age, delivers ownership of the automobile to Sherry after he receives her payment of $10,000. Subsequently, before Sherry reaches the age of 18 (the age of majority), she is involved in an automobile accident caused by her own negligence. The automobile sustains $7,000 worth of damage in the accident (the automobile is now worth only $3,000). Sherry can disaffirm the contract, return the damaged automobile to Bruce, and recover $10,000 from Bruce. In this result, Sherry recovers her entire $10,000 purchase price from Bruce, and Bruce has a damaged automobile worth only $3,000.

More on Intoxicated Persons

-A person who disaffirms a contract based on intoxication generally must be returned to the status quo. In turn, the intoxicated person generally must return the consideration received under the contract to the other party and make restitution that returns the other party to status quo. After becoming sober, an intoxicated person can ratify the contracts entered into while intoxicated. Intoxicated persons are liable in quasi-contract to pay the reasonable value for necessaries they receive. -This is an uphill climb in most jurisdictions -M'Naughten rule also applies -Needs to remedy the situation after sobering up (or attempt to), if they don't/ further their act sober, then this remedy is essentially gone

Insane but not adjudged insane

-Being insane but not having been adjudged insane by a court or an administrative agency §A contract entered into by such person is generally voidable by such person (as long asthey can prove that the person was incompetent when entering into the contract §Insane persons are liable in quasi contract to pay the reasonable value for the necessaries of life they receive A person who has dealt with an insane person must place that insane person in status quo if the contract is either void or voided by the insane person. Most states hold that a party who did not know he or she was dealing with an insane person must be placed in status quo on voidance of the contract -Some people have alternating periods of sanity and insanity- contracts made while such a person was not legally sane can be disaffirmed -Contracts made by such a person during a lucid interval are enforceable

Contracts Contrary to Law

-Both federal and state legislatures have enacted statutes that prohibit certain types of conduct -Contracts to perform activities that are prohibited by statute (law) are illegal contracts

The Majority Rule

-Contract is voidable only if the person was so intoxicated when the contract was entered into that he or she was incapable of understanding or comprehending the nature of the transaction -amount of alcohol or drugs that must be consumed for a person to be considered legally intoxicated to disaffirm contracts varies from case to case

Covenant not to compete

-Contract that provides that a seller of a business or an employee will not engage in a similar business or occupation within: §Specified geographical area for a specified time following the sale of the business or termination of employment §Must have above 3 elements to be deemed reasonable by courts -If it is unreasonable, courts can refuse to enforce it (more common), or change it to be reasonable -Also called a noncompete clause -Used to protect goodwill after a sale

Contract in restraint of trade

-Contract that unreasonably restrains trade-held to be unlawful -Example It would be an illegal restraint of trade for Toyota, General Motors, and Ford to agree to fix the prices of the automobiles they sell. Their contract would be void and could not be enforced by any of the parties against the other parties.

Immoral Contract

-Contract whose objective is the commission of an act that society considers immoral-may be found against public policy §Judge must look to beliefs/morals of society, not individual §Example A contract that is based on sexual favors is an immoral contract and void as against public policy

Adjudged Insane

-Declared legally insane by a proper court or administrative agency §A guardian is appointed on person's behalf §A contract entered into by a person adjudged insane is void-does not happen often §Only contracts entered into by a guardian on behalf of the adjudged insane person are valid If no family member-the state takes over -Judging someone adjudged insane: first step is obtaining affidavits from physicians claiming prison is legally insane-filed with complaint -Trial goes on to determine if person is adjudicated insane

(Competent Party's) Duty of Restitution

-If a minor has transferred money, property, or other valuables to the competent party before disaffirming the contract, that party must place the minor in status quo §The minor must be restored to the same position he or she was in before the minor entered into the contract. Usually done by returning the consideration to the minor. If the consideration has been sold or has depreciated in value, the competent party must pay the minor the cash equivalent. -Most states provide that the minor owes a duty of restitution and must put the adult in status quo on disaffirmance of the contract if the minor's intentional, reckless, or grossly negligent conduct caused the loss of value to the adult's property. On occasion, minors might misrepresent their age to adults when entering into contracts. Most state laws provide that minors who misrepresent their age must place the adult in status quo if they disaffirm the contract.

Necessaries of Life EX

-Items such as food, clothing, shelter, and medical services are generally understood to be necessaries of life. -Goods and services such as automobiles, tools of trade, education, and vocational training have also been found to be necessaries of life in some situations.

Exculpatory Clause EXs

-Jim voluntarily enrolls in a parachute jump course and signs a contract containing an exculpatory clause that relieves the parachute center of liability for ordinary negligence. After receiving proper instruction, he jumps from an airplane. Unfortunately, Jim is injured when he could not steer his parachute toward the target area. He sues the parachute center for damages. Here, the court would usually enforce the exculpatory clause, reasoning that parachute jumping was a voluntary choice and did not involve an essential service. -If a department store had a sign above the entrance stating, "The store is not liable for the ordinary negligence of its employees," this would be an illegal exculpatory clause and would not be enforced.

Regulatory Licensing Statute

-Licensing statute enacted to protect the public -Statutes that require persons or businesses to obtain a license from the government to qualify to practice certain professions or engage in certain types of businesses. -Generally, unlicensed persons cannot recover payment for services when they do not have the required license. -Requires someone to display competence in order to get license (CPA, law, etc) -Example State law provides that legal services can be provided only by lawyers who have graduated from law school and passed the appropriate bar exam. Nevertheless, suppose Marie, a first-year law student, agrees to draft a will for Randy for a $450 fee. Because Marie is not licensed to provide legal services, she has violated a regulatory statute. She cannot enforce the contract and recover payment from Randy. Randy, even though receiving services by having his will drafted, does not have to pay Marie $450.

Revenue-Raising Statute

-Licensing statute with the primary purpose of raising revenue for the government §A person who provides services pursuant to a contract without the appropriate license required by such a statute can enforce the contract and recover payment for services rendered. -EX: A state licensing statute requires licensed attorneys to pay an annual $500 renewal fee without requiring continuing education or other new qualifications. If a lawyer provides legal services but has not paid the annual licensing fee, the lawyer can still recover for her services.

3 types of Contractual Incapacity

-Minors -Mentally Incompetent Persons -Intoxicated Persons

Parent's Liability for the Children's Contracts

-Parents owe a legal duty to provide food, clothing, shelter, and other necessaries of life for their minor children -Parents are liable for their children's contracts for necessaries of life if they have not adequately provided such items -Parental duty of support terminates if a minor becomes emancipated

•If the court finds that a contract or contract clause is unconscionable, it may:

-Refuse to enforce the contract -Refuse to enforce the unconscionable clause but enforce the remainder of the contract -Limit the applicability of any unconscionable clause so as to avoid any unconscionable result -EX:Suppose a door-to-door salesperson sells a poor family a freezer full of meat and other foods for $3,000, with monthly payments for 60 months at 20 percent interest. If the actual cost of the freezer and the food is $1,000, this contract could be found to be unconscionable. The court could either find the entire contract unenforceable or rewrite the contract so that it has reasonable terms.

Legal Insanity

-State of contractual incapacity, as determined by law -Most states use the objective cognitive "understanding" test to determine legal insanity. Under this test, the person's mental incapacity must render that person incapable of understanding or comprehending the nature of the transaction. -Courts use OBJECTIVE rationalization, not SUBJECTIVE

Contracts of Adhesion

-preprinted forms whose terms the consumer cannot negotiate and that they must sign in order to obtain a product or service. -"Take it or leave it" -Automobile sales contracts and leases, mortgages, and apartment leases are usually contracts of adhesion.

In pari delicto

A situation in which both parties are equally at fault in an illegal contract (what courts use often)

(Competent Party's) Duty of Restitution EX

If in the prior example Sherry had recklessly caused the accident (e.g., by driving 20 miles an hour over the speed limit) or had misrepresented her age when she purchased the car, Sherry can still disaffirm the contract and return the damaged automobile to Bruce, but she can recover only $3,000 from Bruce. In this result, Bruce is made whole (he keeps $7,000 of Sherry's money and has a damaged automobile worth $3,000). Sherry has $3,000.

Covenant not to compete EX

Stacy is a certified public accountant (CPA) with a lucrative accounting practice in Providence, Rhode Island. Her business includes a substantial amount of goodwill with her clients. Stacy sells her accounting practice to Gregory. When she sells her practice to Gregory, Stacy agrees not to open another accounting practice in the state of Rhode Island for a 20-year period. This covenant not to compete is reasonable in the line of business protected but is unreasonable in geographic scope and duration. It will not be enforced by the courts as written. The covenant not to compete would be reasonable and enforceable if it only prohibited Stacy from practicing as a CPA in the city of Providence for three years.

Licensing Statute

Statute that requires a person or business to obtain a license from the government prior to engaging in a specified occupation

Usury Laws EX

Suppose a state has set a usurious rate of interest as any interest rate above 15 percent. Christopher borrows $1,000 from Tony, which requires Christopher to pay $4,000 in one year to pay off the loan. This is a usurious loan because that amount of interest—$3,000—calculates to a 300 percent annual interest rate.

Indian Gaming Regulatory Act (IGRA)

a federal statutes that sets the requirements for establishing casino gambling and other gaming activities on tribal land

Exculpatory Clause (release of liability clause)

•A contractual provision that relieves one (or both) of the parties to a contract from tort liability for ordinary negligence -Cannot be used in a situation involving willful conduct, intentional torts, fraud, recklessness, or gross negligence -Exculpatory clauses that either affect the public interest or result from superior bargaining power are usually found to be void as against public policy. The greater the degree to which the party serves the general public, the greater the chance that the exculpatory clause will be struck down as illegal. The courts will consider such factors as the type of activity involved; the relative bargaining power, knowledge, experience, and sophistication of the parties; and other relevant factors. -often found in leases, sales contracts, sporting event ticket stubs, parking lot tickets, service contracts, and the like. Such clauses do not have to be reciprocal (i.e., one party may be relieved of tort liability, whereas the other party is not). -"X shall not be responsible for"

Minors

•A person who has not reached the age of majority -Does not have the maturity, experience, or sophistication needed to enter into contracts •Many states have enacted statutes that specify the age of majority (the legal age for a person to have the capacity to enter into a contract) -Generally 18 years of age for both males and females •Any age below the statutory age of majority is called the period of minority

Intoxicated Persons

•A person who is under contractual incapacity because of (voluntary) ingestion of alcohol or drugs to the point of incompetence -The contract is not voidable by the other party if that party had contractual capacity

Emancipation

•Act or process of a minor voluntarily leaving home and living apart from his or her parents -Getting married, setting up a separate household, joining the military, etc

Unconciousable Contracts

•Contract that courts refuse to enforce in part or at all because it is so oppressive or manifestly unfair as to be unjust -This doctrine may not be used merely to save a contracting party from a bad bargain -The courts are given substantial discretion in determining whether a contract or contract clause is unconscionable. No single definition of unconciousability -Based on public policy, equity -All uncounciousable contracts arise out of adhesion contracts

Lawful Contract

•Contract that has a lawful object

Contracts Contrary to Public Opinion

•Contract that has a negative impact on society or that interferes with the public's safety and welfare (void)

Illegal Contract

•Contract that has an illegal object -Such contracts are void (or unenforceable) -Does not have to be a criminal act

Contract to Commit Crimes

•Contracts to commit criminal acts are void •If the object of a contract becomes illegal after the contract is entered into because the government has enacted a statute that makes it unlawful, the parties are discharged from the contract -The contract is not an illegal contract unless the parties agree to go forward and complete it

Infancy Doctrine

•Doctrine that allows minors to disaffirm (cancel) most contracts they have entered into with adults -Minors have the option to void the contract -Objective standard; may affirm some but disaffirm other parts of the contract -If both parties are minors, both parties have the right to disaffirm the contract

Effect of Illegality

•Doctrine that states that the courts will refuse to enforce or rescind an illegal contract and will leave the parties where it finds them (if the contract is executed) -Also, because illegal contracts are void, the parties cannot sue for nonperformance -Persons who can assert an exception from the general rule of the effect of finding an illegal contract (and use the court system to sue for damages to recover considerations paid under the illegal contract)

Necessaries of Life

•Food, clothing, shelter, medical care, and other items considered necessary to the maintenance of life -Minors must pay the reasonable value of necessaries of life for which they contract -Determined by minor's age, lifestyle, status in life, etc -The seller's recovery is based on the equitable doctrine of quasi-contract rather than on the contract itself. Under this theory, the minor is obligated only to pay the reasonable value of the goods or services received. Reasonable value is determined on a case-by-case basis.

Contractual Capacity

•Law presumes that parties have the requisite contractual capacity to enter into a contract •Persons who do not have this capacity are: -Minors -Insane persons -Intoxicated persons •A contract to perform an illegal act is called an illegal contract -Are void contracts The common law of contracts and many state statutes protect persons who lack contractual capacity from having contracts enforced against them. The party asserting incapacity or his or her guardian, conservator, or other legal representative bears the burden of proof.

Mentally Incompetent Persons

•Law protects people suffering from substantial mental incapacity from enforcement of contracts •To be relieved of duties under a contract, law requires a person to have been legally insane at the time of entering the contract -M'Naughten rule applies: if the person was mentally incompetent (did not know right from wrong/the consequences of their action), then they are not subject to liability for a contract they enter into

Usury Laws

•Law that sets an upper limit on the interest rate that can be charged on certain types of loans •Lenders who charge a higher rate than the state limit are guilty of usury •Intended to protect unsophisticated borrowers from loan sharks and others who charge excessively high rates of interest •Most usury laws exempt certain types of lenders and loan transactions involving legitimate business transactions from the reach of the law. These exemptions usually include loans made by banks and other financial institutions, loans above a certain dollar amount, and loans made to corporations and other businesses. -Business transactions: businesses lending money/seeking money, or B2B -The market will police itself

Gambling Statutes

•Statutes that make certain forms of gambling illegal (and/or regulate other forms) •States provide various criminal and civil penalties for illegal gambling

Ratification

•The act of a minor after the minor has reached the age of majority by which he or she accepts a contract entered into when he or she was a minor -After the "reasonable time" -Done by implied conduct, oral words, written words

Disaffirmance

•The act of a minor to rescind a contract under the infancy doctrine -Can be done orally, in writing, or by the minor's conduct at any time during period of minority plus a "reasonable time"

Elements of Unconscionability

•The parties possessed severely unequal bargaining power •The dominant party unreasonably used its unequal bargaining power to obtain oppressive or manifestly unfair contract terms •The adhering party had no reasonable alternative -sometimes found where there is a consumer contract that takes advantage of uneducated, poor, or elderly people who have been persuaded to enter into an unfair contract. -Equal bargaining power: both parties are interested in obtaining the others business so they will listen to each other and negotiate to find a common ground -Adhesion contract is unequal bargaining power