Business Law Chapter 11

Members of Protected Clauses

when a statute protects a certain class of people, these people can sometimes enforce an illegal contract even though the other party cannot. Example: there is a statute prohibiting flight attendants from working more than a certain number of hours per month. If an airline forces its attendants to work more and refuses to pay them overtime, the attendants could sue for overtime pay even though they should not have worked that many hours.

Justifiable Ignorance of the Facts

when one party is relatively innocent and has no reason to know the contract is illegal, that party can often get a court to return the parties to their original positions as if a contract never existed (the court still would not enforce an illegal contract).

Mentally Incompetent Persons; 3 Rules

1) If a court has ruled that a person is mentally incompetent and a guardian has been appointed, any contract made by this person is void (no good). Only the guardian can enter into valid contracts.

Parents may be held liable if...

1) the minor is acting under the direction of the parent, or 2) the minor lives at home with parent and commits a malicious tort (some states have this rule).

Mentally Incompetent Persons; 3 Rules

2) If a person is mentally incompetent but no court has adjudged this fact, the contract may be voidable if the person does not know he/she is entering into a contract, or if the person lacks the mental capacity to comprehend the nature, purpose, and consequence of the contract. The contract is voidable by the incompetent person only. This person can disaffirm the contract but must return whatever consideration he/she has received. Ratification can occur if the person regains competence and ratifies the contract, or if a guardian is appointed and that person ratifies the contract. Mentally incompetent persons are also liable for the reasonable value of any necessaries they receive.

Mentally Incompetent Persons; 3 Rules

3) A contract entered into by a mentally incompetent person (but not adjudged so by a court) may be valid and enforceable if the contract was formed during a lucid interval.

Intoxicated Contracts

Generally contracts are rarely allowed to be avoided on the grounds of intoxication. Finally, just like minors, intoxicated persons are liable for the reasonable value of necessaries.

Exception to the General Rule of Illegality

Justifiable Ignorance of the Facts, Members of Protected Classes, Withdrawal from an Illegal Agreement, Fraud, Duress, or Undue Influence

Contracts to Contrary to Statute

Usury, Gambling, Sabbath (Sunday) Laws, Licensing Statutes

Liabilities for Necessaries

a necessary is anything required to live, such as food, clothing, shelter, and medical attention. This includes anything required to maintain a person's standard of living. A minor who enters into a contract for necessaries may disaffirm the contract but remains liable for the reasonable value of the goods used. To qualify as a contract for necessaries: a) item must be necessary to the minor's existence b) value of necessary may be up to a level to maintain minor's standard of living c) minor must not be under the care of a parent or guardian who is required to supply the item.

A Minor's Obligation on Disaffirmance

a) majority of states hold that the minor only has to return the goods subject to the contract (but only if the minor has possession or control of the goods) even if the goods are now damaged. b) a growing number of states now say that a minor can disaffirm a contract but also must return the goods in the same or similar condition as when the contract was made.

When a person enters into a contract with an unlicensed person, the contract may still be valid depending on the nature of the licensing statute:

a) some state statutes provide that contracts with unlicensed persons are void b) if there is no state statute expressly prohibiting contracts with unlicensed people, then: 1) if the purpose of the licensing statute is to protect the public from unauthorized practitioners, a contract involving an unlicensed person is void and unenforceable. 2) if the purpose of the statute is to raise government revenues, a contract with an unlicensed person is enforceable.

Convenants Not to Compete

a) sometimes created when a seller of a business agrees not to open a new store in a certain geographical area around the current store. These type of covenants are not valid unless they are negotiated as part of the sale of a business. These covenants not to compete are valid so long as they are: 1) reasonable in terms of time, and 2) reasonable in terms of geographic area. b) these covenants can also be contained in employment contracts. These covenants are also only valid if reasonable in terms of the geographic area and time. Some courts will not hold an unreasonable covenant not to compete void but will reform the terms and make the terms reasonable (reformation---where the court will correct or change the terms of a contract and make the terms reasonable).

Licensing Statutes

all states require that members of certain professions obtain licenses to practice that profession (doctors, lawyers, accountants, real estate brokers, etc.).

Usury

charging an illegal rate of interest. Each state has a law setting the maximum interest rate that can be charged in a loan. If someone charges a higher interest rate they have committed usury. Possible solutions to usurious contracts: a) some states allow recovery of the loan but set the interest rate at the legal maximum. b) some states allow the lender to recover the principal amount but no interest. c) some states void the entire contract and the lender recovers nothing.

Exculpatory Clauses

clauses that release a party from liability in the event of monetary or physical injury no matter who is at fault. Generally these exculpatory clauses are held to be against public policy and are void. This is especially true when the business is important to the public interest (public utilities, common carriers, etc.). These clauses may be enforceable when the parties are not involved in businesses considered important to the public (health clubs, skydiving, amusement parks, etc.).

Procedural Unconscionability

deals with one parties lack of understanding of a contracts terms because of inconspicuous print, unintelligible language, or lack of opportunity to read the contract. Adhesion contracts are drafted by a dominant party and then presented to the other party on a take-it-or-leave-it basis.

Substantive Unconscionability

focuses on contracts or portions of contracts that are overly harsh or oppressive. A court may find these clauses or contracts unenforceable, or it may reform the terms, if the court finds that the contract terms "shock the conscience" of the court.

Legality

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

Loans

generally not considered necessaries even if the minor uses the money to buy necessaries unless the purpose of the loan is to buy necessaries and this fact is expressly stated in the loan.

Parental Liability

generally parents are not liable for the contracts made by minor children acting on their own except for contracts for necessaries which the parents are legally obligated to provide. Generally a minor is held personally liable for the torts he/she commits.

Intoxicated Persons

if a person who is sufficiently intoxicated to lack mental capacity enters into a contract, the contract is voidable at the option of the intoxicated person (even if the intoxication is voluntary).

Withdrawal from an Illegal Agreement

if the illegal part of a bargain has not yet been performed, the party tendering performance can withdraw from the bargain and recover the performance or its value. Ex.---2 people make a bet on a boxing match and give me the money to hold. The illegal part of a bet does not occur until money is paid to the winner. Until that time occurs, either party may withdraw from the agreement by giving notice to me of the withdrawal.

The Effect of Illegality

in general an illegal contract is void and the courts will not aid either party. If the contract is executory (not fully performed) neither party can enforce it; if it is executed (completed) neither party can recover from the other.

Gambling

in general gambling contracts are illegal and void. Gambling is generally defined as any scheme that involves the distribution of property by chance among persons who have paid valuable consideration for the chance to receive the property. Some states have legalized casino gambling, lotteries, horse racing, dog racing, jai lai, etc. Because life insurance is a form of gambling, these contracts can only be entered into by someone with an insurable interest (blood, marriage, important employee, etc.)

Voidable Contract for the Intoxicated

must be proved that the intoxicated person's reason and judgment were impaired to the extent that he/she did not comprehend the legal consequences of entering into the contract.

Disaffirmance and Misrepresentation of Age

ordinarily a minor can disaffirm a contract even if he/she misrepresents his/her age. a) some states will not allow the minor to be sued for the tort of fraud b) some states do allow the minor to be sued for the tort of fraud c) some states have enacted laws binding minors to a contract when they misrepresent their age d) some states do not allow a minor to disaffirm executed contracts unless the minor can return the consideration

Sabbath (Sunday) Laws

prohibit the formation or performance of all or certain contracts on Sunday. These laws are legal unless a state statute prohibits them.

Emancipation

regarding minors, the act of being freed from parental control; it occurs when a child's parent or guardian relinquishes control over the child. If a court grants this, then the minor is generally bound by the contracts he/she makes.

Contracts Contrary to Public Policy

some contracts are not enforceable because of the negative impact the contracts would have on society.

Ratification

the act of accepting and giving legal force to an obligation that previously was not enforceable. A minor can do this after reaching the age of majority by: Express Ratification and Implied Ratification

Minors

the age of majority in most states (all states that I know) is 18. Generally minors can enter into any contract an adult can as long as the contract is not one prohibited by law (minors and alcohol for example).

Contractual Capacity

the legal ability to enter into a contract. It is the minimum mental capacity required for a party to be bound by a contract.

Contracts in Restraint of Trade

these are viewed as anti-competition agreements and against our free market system. Ex.---I'll pay you $1000 if you never shop in Walmart again.

Unconscionable Contracts or Clauses 2 Types

these are where a contract or clause is void on the basis of public policy because one party, as a result of his/her inferior bargaining power is forced to accept terms that are unfairly burdensome and that unfairly benefit the dominating party.

Disaffirmance

this is the avoidance or setting aside of a contractual obligation. A minor can disaffirm or avoid a contract by showing an intent not to be bound by it. Most contracts can be disaffirmed by a minor at anytime before reaching the age of majority or for a reasonable time after reaching majority. When a minor disaffirms, all property transferred to the minor can be recovered even if it is in the possession of a third party. Also, if a minor chooses to disaffirm, he/she must disaffirm the entire contract.

Insurance

traditionally not considered a necessary so a minor can disaffirm the contract and recover premiums paid (minors generally cannot disaffirm life insurance contracts on their own lives).

Fraud, Duress, or Undue Influence

whenever a party has been induced to enter into an illegal bargain as a result of fraud, duress, or undue influence (the bargain is illegal as a result of fraud, duress, or undue influence), he/she can either enforce the contract or recover for its value.

Implied Ratification

where conduct of minor is inconsistent with disaffirmance or where minor does not disaffirm within a reasonable time of reaching majority.

Express Ratification

where minor expressly states he/she intends to be bound by contract