BLS Ch 16 Capacity and Legality
Exception to Intoxicated Persons
--if the intoxication just causes the person to exercise poor judgement, the contract is not voidable unless the other party unfairly capitalized on the impaired judgement --When the intoxicated person becomes sober, the contract can be ratified or disaffirmed, but the courts will fairly liberally interpret behavior that seems like ratifying the contract once the intoxicated person becomes sober.
Effects of Illegal Agreements
1. In Pari Delicito: in equal fault 2. Severable Contract:a contract whose terms can be divided 3. Indivisible Contract: a contract that cannot be divided and must be performed in its entirety.
Adhesion Contract
A contract created by a party to an agreement that is presented to the other party on a take-it-or-leave it basis. Such contracts are legal but are sometimes rescinded on the grounds of Unconscionability and the absence of one partys free will to enter a contract.---also known as an agreement to waive your negligence, however, cannot waive negligence when the agreement involves the public.
Unconscionable
A term applied to a contract in which one party has so much more bargaining power than the other party that the powerful party dictates the terms of the agreement and eliminates the other partys free will.---grossly unfair agreement
Gambling
Agreements in which parties pay consideration (money placed during bets) for the chance or opportunity to obtain an amount of money or property.
Agreements to Commit a Crime or Tort
Any agreement to commit a crime or tort is illegal and unenforceable. However, should a legal contract be formed and its subject later becomes illegal under a new statute, the contract is considered to be discharged by the law--because a change in the law has made the subject matter of the contract illegal, both parties are discharged from their obligations under the contract
Minors
As a general rule, any contract entered into by a minor is voidable by the minor and only the minor, even if there are no formatlities in the contract (disaffirm the contract) until he or she reaches the age of the majority or a reasonable time thereafter. The traditional rule makes sense if we view minors as innocents in need of protection from competent adults who would otherwise take advantage of them.
Parents Liability for their Childrens Contracts, Necessaries and Torts
As a general rule, parents are not liable for the contracts entered into by their minor children. Thus merchants often want a competent person to cosign and be legally bounded to perform if the minor no longer wishes to live up to the terms in the contract.
Mentally Incapacitated Persons
Contracts of a person with limited mental capacity can be valid, voidable or void depending on the extent of the mental incapacity. If a person suffers from delusions that impair their judgement but they can still understand that they are entering into a contract and understand their obligations to the contract, it is valid. If the delusions prevent the person from understanding that they are entering into a contract or the nature/extent of their obligations under the contract, it is voidable. If he/she has been adjudicated insane, the contract is void.
Intoxicated Persons
Contracts of an intoxicated person are voidable if the other party has reason to know that intoxication rendered the person unable to understand the nature/consequences of the transaction or unable to act in a reasonable manner in relation to the transaction.
Exception to the Majority Rule (Minors)
In some states hold that when a minor who appears of the age of majority misrepresents his or her age and a competent party relies on that misrepresentation in good faith, the minor gives up the right to disaffirm the agreement and can be treated as an adult.Some states allow that the minor just restore the competent party to that partys precontract position before allowing the dissafirmance OR some states allow the minor to disaffirm but then give the competent party the right to sue the minor/recover damages
Contracts in Restraint of Trade
Include Covenants Not to compete: an agreement not to compete against a party for a set period of time within a designated geographic area.
Sabbath Laws
Limit the types of business activities in which parties can legally engage on sundays
Usury
Occurs when a party gives a loan at an interest rate exceeding the legal maximum. The exception though is when trying to facilitate business transactions and keep the economy healthy, for example, most states with usury statutes allow corporations willing to pay more to lend/borrow at rates exceeding the maximum. In converse if a corporation is willing to borrow at a higher interest rate, parties should be allowed to lend at that rate for corporations only. --states also sometimes allow parties to make small loans at rates above the maximum to parties that cannot obtain a needed loan at the statutory maximum. --if no exception allows a usurious loan, the legal outcome varies by state--some states declare all usurious loans void (lender cannot recover either interest or principal from the borrower) ---some states allow the lender to recover principal but not interest.
Express ratification
Occurs when after reaching the age of majority, the person states orally or in writing that he or she intends to be bound by the contract entered into as a minor.
Implied Ratification
Occurs when the former minor takes some action after reaching the age of majority consistent with intent to ratify the contract. ex: continuing to make car payments once you have reached the age of majority.
Ratification
Once a person reaches the age of majority they can choose to legally affirm contracts made as a minor. Once this happens, the contract is no longer voidable. Includes express and implied.
Exculpatory Clauses
Releases one of the contracting parties from all liability, regardless of who is at fault or what injury is suffered
Licensing Statutes
Requirements reflect the value society places on proper performance of duties in the licensed professions. Licensing statutes have three main purposes: 1) to give the government some control over which people and how many people can perform certain jobs, 2) to obtain revenue by charging for licenses 3)The protection of the publics health, safety and welfare is related to the public interest. **if the licensing statute is intended simply to generate revenue then the contract of the unlicensed person is valid **if the purpose of the licensing statute is to protect health, safety and welfare, the agreement of an unlicensed person is typically deemed illegal and unenforceable.
Liability of Minors for Necessaries
Technically minors can disaffirm contracts for necessaries, but they will be held liable for the reasonable value of the necessary. The purpose of this is to ensure that sellers will not be reluctant to provide minors with the basic necessities of life when their parents will not provide for them.
Incapacity/Incompetence
The possession of a mental or physical defect that prevents a natural person from being able to enter into a legally binding contract.
Capacity
The third element of a legally binding contract. A person who has legal capacity and has the mental ability to understand his or her rights and obligations under a contract, and therefore presumably to comply with the terms.
Agreements in Contradiction to Public Policy
These types of agreements include: 1. Contracts in Restraint of Trade 2. Unconscionable Contracts or Clauses 3. Exculpatory Clauses
Contracts that Violate State or Federal Statues
These types of contracts include agreements to commit a crime or tort, licensing statutes, Usury, Gambling and Sabbath Laws
Legality
To be enforceable, contracts must have legal subject matter and must be able to be performed legally.
Substantive Unconscionability
Unconscionability that derives from contract terms that are so one-sided or overly harsh that the contracts should not be enforced.
Procedural Unconscionability
Unconscionability that derives from the process of making a contract.