Chapter 12

Contractual Capacity: Age of majority

18 years old is the cutoff in most states 1. General rule: A minor can enter into any contract an adult can provide that the contract is not one prohibited by law for minors 2. Voidable at the option of that minor, subject to certain exceptions 3. To void a contract, a minor only needs to clearly show an intention not to be bound by it

Legality: Exculpatory Clauses

A clause that releases a contractual party from liability in the event of monetary or physical injury, no matter who is at fault Typically NOT enforced: - Residential property lease -Employment contracts which remove employer's potential liability for injuries to employees CAN be enforced: - Those that LIMIT but do not release a party from liability, are not ambiguous, and do not claim to protect parties from liabilites for intentional misconduct- and involve non-essential services -Health clubs, race tracks, amusement parks, skiing resorts -People contract for these services voluntarily

Settlement of claims: Accordance and Satisfaction

A common means of settling a disputed claim, whereby a debtor offers to pay a lesser amount than creditor purports to be owed It's important to understand the nature of consideration given Typically occurs when the amount of debt is in dispute

Settlement of claims: Release

A contract in which one party forfeits the right to pursue a legal claim against the other party Prohibits any further recovery beyond the terms stated in the release Generally binding if: - Given in good faith - Stated in signed writing (required by many states) - Accompanied by consideration Ex: Sign a release to bungee jump - Forfeiting your right to sue Consideration needs to be getting something of legal value (forbearance)

The effect of legality: Severable Contract

A contract that is divisible because it consists of distinct parts that can be performed separately, with separate consideration given for each part Courts may enforce the legal portion but not the illegal portion, so long as the illegal portion does not affect the essence of the bargain Ex: Employment agreement that includes an overly broad (illegal) covenant not to compete​

Promissory Estoppel

A doctrine that can be used to enforce a promise when the promisee has justifiably relied on it and when justice will be better served by enforcing the promise "Detrimental Reliance" A promise may be enforced even though consideration was not given; an otherwise unenforceable promise was made and relied on: As a result, promisor cant argue lack of consideration as a defense Allows a party to recover on a promise even though that promise was made without consideration Happens a lot in emplyement (promises made by employees when recruiting) "If you fall, I will catch you..."

Which of the following is an example of something of legally sufficient value?

A promise to do something that you otherwise have no prior legal obligation to do. Performing an action that you otherwise have no prior legal duty to do. Refraining from an action that you have a legal right to undertake.

Agreements that lack consideration: Rescission

A remedy where a contract is canceled and the parties are returned to the positions they occupied before the contract was entered into -The parties to the contract can agree to rescind -Can be done to the extent the contract is executory -If the parties enter into a new contract: It is often difficult to determine whether there was sufficient consideration given for the new contract OR whether the parties had a preexisting duty under the original contract

Agreements that lack consideration: Illusory Promise

A statement that is uncertain and vague that is not considered a definite promise The statement does not contain a definite promise to do something Ex: CEO says to her employees, "All of you have worked hard, and if profits remain high, a 10% bonus at the end of the year will be given, as long as management thinks it is warranted" The CEO is merely declaring that management might or might not do something- no promise is truly given There is no bargained-for consideration

4 Elements for an enforceable contract

Agreement Consideration Capacity Legality

Promissory Estoppel: 5 Requirements

All must be meant: 1. Clear and definite promise 2. Promisor should have expected promisee would rely on the promise 3. Promisee reasonably relied on the promise by acting or refraining from some act 4. Promisee's reliance was definite and resulted in substantial detriment 5. Enforcement of the promise is necessary to avoid injustice Concerned about a person who relied on a promise, not a way for a person to recover ... Quasi Contract (court seeks to impose fairness)

Adding to the facts presented above in Question 11, Kayla recalls receiving an email from Lance where he stated that the engine of the 1963 Chevrolet Corvair was the original engine that came with the car. However, when Marvin inspected the Corvair, he discovered that the engine had been replaced in 1975 with an engine that is knowingly defective (which significantly reduced the value of the Corvair purchased by Kayla). Kayla then amends the complaint she filed with the court referenced in Question 11 and alleges that Lance committed fraud. Which of the following is true?

Although courts don't typically get involved in analyzing the amount of consideration paid by a party to a contract, it is possible the court may view the extra consideration paid by Kayla as a potential symptom of a greater problem (which in this case, is the alleged fraud). It is possible the court will rule that the contract is voidable if it determines that Lance committed fraud in connection with the contract.

Settlement of claims: Accord

An agreement under which one party promises to give or perform, and the other party to accept, in satisfaction of a claim, something different from what the parties originally agreed

Contractual Capacity: Obligations and exceptions to disaffirm

An increasing number of states impose an obligation on disaffirming minors to restore adults to pre-contract position Exceptions: - Marriage - Enlist in military - Contracts entered into by a minor engaged in business as an adult - Contracts for necessaries: basic needs such as food, clothing, shelter, and medical services

Which of the following is an example of forbearance?

Based on an agreement with Office Depot, your company agrees not to purchase office supplies from Office Max, a competitor of Office Depot. Based on an agreement with my grandmother, my 75-year old grandfather agrees to refrain from a life of debauchery involving playing billiards at the pool hall, drinking alcohol, and smoking cigarettes.

Antonio and Blythe get into a car accident. Because he is likely at fault, Antonio gives to Blythe $3,000 as consideration for Blythe entering into a release whereby she releases Antonio from any further liability resulting from the car accident. They execute a written contract that day. The next day, Blythe takes her car into the repair shop, which provides her with an estimate of $4,200 to make all repairs to her car. What happens?

Blythe is responsible for paying the difference.

Contractual Capacity

Capacity required by the law for a party who enters into a contract to be bound by that contract -The legal ability to enter into a contractual relationship (competence)

Carol Rogers, a local millionaire, promises to donate $500,000 to the Springfield Humane Society, which the society plans to use to build a new animal hospital. Based on Carol's promise, the society begins work on the hospital. Carol then backs out of her offer.

Carol can be sued for the money under a theory of promissory estoppel

Contractual Capacity: Intoxicated Persons

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 MIGHT be voidable at that person's option: he or she must return all consideration received Must prove intoxication impaired their reason and judgment so severely that they did not comprehend the legal consequences of entering into the contract Even though he or she voluntarily entered into the contract Practically speaking, courts use an objective t4est, so it's rare for contracts to be avoided due to intoxication

Legality: Unconscionable

Contract or clause that is void on the basis of public policy because one party was forced to accept terms rthat are unfairly burdensome and unfairly benefit stronger party

Legality: Contracts contrary to public policy

Contracts in restraint of trade The strong public policy favoring competition in the economy Mergers often violate public policy and antitrust law Ex: U.S. foods and Sysco merger agreement was blocked in 2015 for these reasons (monopolies)

Contractual Capacity: Mentally incompetent persons

Contracts made by mentally incompetent persons can be void, voidable, or valid Void: If a court has previously determined that a person is mentally incompetent and has appointed a guardian to represent the person (the only guardian can enter into a binding contract on that person's behalf) Voidable: If a court has not previously judged a person to be mentally incompetent AND the person did not know he or she was entering into the contract or the person lacked the mental capacity to comprehend its nature, purpose, and consequences (can only be voided by the mentally incompetent person; not the other party) Valid: If a person was competent when the contract was formed (Lucid intervals: temporary periods of sufficient intelligence, judgment, and will) Frequently happens with wills

Melissa is a minor who agrees to purchase a car from Umberto for $10,000 one month after she turns eighteen years of age. On turning eighteen, Melissa writes to Umberto stating that she still agrees to purchase the car. Melissa's contract with Umberto is:

Enforceable, because it has been expressly ratified by Melissa

When analyzing the legality requirement for a valid, enforceable contract, we only need to analyze whether the purpose of the agreement is legal under statutory law.

False; we need to also consider whether or not the contract violates public policy.

The effect of illegality

General Rule: Neither party to an illegal bargain can sue for breach and neither party can recover for performance rendered Exception: -When one party has no reason to know that the contract is illegal, that party can often recover any benefits given up in a partially executed contract - Restores party to the original position Ex: Trucking company can still collect its fees even though it has transported illegal goods -Members of protected classes Ex: Statutes prohibit certain employees (such as flight attendants or pilots) from working more than a specified number of hours per month; an employee who is required to work more than the maximum can recover for those extra hours of service (if the other party is refusing to pay him or her)

Contractual Capacity: Minors parent's liability

General rule: Parents are not liable for the contracts entered into by minor children acting on their own, except contracts for necessaries, which the parents are legally required to provide Businesses ordinarily require parents to co-sign any contract entered into with a minor Parents then become personally obligated to perform the conditions of the contract, even if their child avoids liability If parents aren't a party to a contract, they have no obligations Ex: Teenagers singing at the mall, 16-year old performer (can ratify or disaffirm), if she voids at 17, parents need to pay expenses that mall paid to promote her

Consideration: Adequacy, Who decides?

However, if there is shockingly bad consideration, the courts may review because that may indicate that fraud, duress, etc. was involved in the contract formation Symptom of a greater problem Courts stay out of "refereeing" if consideration is fair and given

Which of the following is a requirement for a release?

It must be given in good faith. It must be stated in a signed writing. It must be accompanied by consideration.

Legality

Legal purpose Contract to do something prohibited under federal or state statutory law is illegal --> void and unenforceable from the outset If the object or performance of a contract is rendered illegal by statute AFTER the contract has been formed, the contract is considered to be discharged (made illegal) Ex: Craigslist advertisement to purchase a kidney -Federal law prohibits the sale of human organs Offer: Purchase kidney for $250,000 is unenforceable

If the original fact pattern above was changed to state that the U.S. Federal Trade Commission (FTC), a federal agency, passed an administrative rule in 1964 that made it illegal to buy or sell 1963 Chevy Corvair vehicles (and that ruling is still in full force and effect today), which of the following elements of a valid, enforceable contract may not have been satisfied when Kayla and Lance entered into a contract whereby Lance agreed to sell the 1963 Corvair to Kayla for $1,200,000?

Legality

Les agrees to install a new hard drive and modem on Marilee's computer in exchange for four of her used textbooks. After he installs the hard drive, Les says he won't install the modem unless Marilee gives him two more books. What legal position are the parties in now?

Marilee can sue for breach of contract, because Les had a preexisting duty to do all of the work.

Legality: Procedural Unconscionability

Often involves inconspicuous print, unintelligible language (Legalese), lack of an oppurtunity to read the contract deprives him or her of any meaningful choice Can also occur when there is such a disparity in bargaining power that the weaker party's consent is not voluntary Ex: Adhesion contract, a standard form contract in which the stronger party dictates the terms on a take-it-or-leave-it basis

Settlement of claims: Satisfaction

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

Agreements that lack consideration

Preexisting Duty: -In most cases, a promise to do what one already has a legal duty to do does not constitute legally sufficient consideration Goal: Prevent against extortion or a "hold up" game Ex: Construction company enters into an agreement with a developer to build a seven-story office building After three months, the construction company demands an extra $57,000 on its contract and threatens to stop working if not paid What about unforeseen difficulties? -Construction company encountered unforeseen rock formation- court may allow an exception if it is not part of ordinary business risk

Agreements that lack consideration: Past consideration

Promises made in return for actions or events that have already taken place are unenforceable Bargained-for exchange is missing (second element of consideration) Ex: Companies which attempt to impose a non-compete covenant upon an existing employee Continued employment is typically not enough to satisfy the consideration requirement Dont sign a non-compete argument, needs value consideration (Ex: Job contract)

Which one of the following is not a requirement for a valid enforceable contract?

Rescission.

Parents of a minor who enters into a contract are generally:

Responsible for the obligations of the minor only if they are parties to the contract.

Consideration: Legally Sufficient value

Something of value in the eyes of the law; may consist of any of these 1. A promise to do something that you otherwise have no prior legal duty to do (To pay a supplier upon receiving goods) 2. Performance of action that you are otherwise not obligated to undertake (provide accounting services, crossing the Royal Gorge Bridge) 3. Forbearance: Refraining from an action that you have a legal right to undertake (not purchasing goods from another supplier; exclusivity)

Contractual Capacity: Minors Ratification

The acceptance or confirmation of an act or agreement that gives legal force to an obligation that previously was not enforceable A minor who has reached the age of majority can ratify a contract expressly or impliedly Express ratification: Occurs when the individual, on reaching the age of majority, states orally or in writing that they intend to be bound by the contract Implied ratification: Occurs when the minor, on reaching the age of majority, behaves in a manner inconsistent with disaffirmance Courts generally presume an executed contract is normally considered to be disaffirmed

Consideration: Bargained-For Exchange

The basis for a bargain struck between or among the contracting parties NOT a gift, distinguishes contracts from gifts Example of a gift: Father to son: "In consideration of the fact that you are not as wealthy as your brothers, I will pay you $5,000" Because the son does not need to give his father something of legal value in return for his father's promise, there is no bargained-for exchange Rather, the father has merely stated he is giving a gift to his son

Legality: Covenant not to compete

The 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 geographic area Within the context of the sale of a company: the contract between buyer and seller whereby the seller agrees not to compete with the buyer after selling its business to the buyer (can be enforceable if it is reasonable and an ancillary part of the sale of business) Within context of employment contract: Contract between employer and employee in which the terms and conditions of employment are outlined (Must be deemed reasonable in terms of time, geography, and scope) We don't want to restrict people from earning a living

Kayla loves to drive old fancy cars. On April 1, 2019 (no April Fool's Day joke), Kayla played and won the MegaMillions lottery. She was awarded $5,000,000. After collecting the prize money on April 15, 2019, Kayla was scrolling through advertisements on Craigslist, when she came across an advertisement posted by Lance, an individual selling a 1963 Chevrolet Corvair. Kayla and Lance entered into a contract whereby Lance agrees to sell the 1963 Corvair to Kayla for $1,200,000. However, when she talks to her friend Marvin, who is an expert in determining the value of old fancy cars, she learns the Corvair she purchased from Lance is only worth $750,000. She feels like she was ripped off, so she decides to sue Lance. Her lawsuit is solely based on the exorbitant amount of consideration she paid to Lance. What will happen to her lawsuit?

The court will likely decline to hear the lawsuit.

Contractual Capacity: Disaffirmance

The legal avoidance, or setting aside, or a contractual obligation To disafirm, a minor must express, through words or conduct, his or her intent not to be bound by it Must disaffirm the entire contract, not just part of it Can disaffirm a contract even after the minor comes of age (18), as long as the contract was entered into as a minor (reasonable timer period required, otherwise ratification is presumed) An adult who enters into a contract with a minor cannot avoid his or her contractual duties on the same grounds (unless the minor exercises the option to disaffirm the contract, the adult is normally bound by it

Consideration

The value is given in return for a promise or performance in a contractual agreement Broken down into 2 parts: - something of LEGALLY SUFFICIENT VALUE must be given in exchange for the promise (doesn't have to be money) -There must be a BARGAINED-FOR exchange

Legality: Substantive unconscionability

When contract or a provision is oppressive or overly harsh Focuses on provisions that deprive one party of the benefits of the agreement or leave the party without remedy for nonperformance by the other Ex: Contract clause that gives a business entity unrestricted access to the courts but requires the other party to arbitrate any dispute with the firm may be unconscionable

Under which of the following scenarios is it possible to have a voidable contract?

When one of the parties is a minor (and he/she may be able to void the contract). When one of the parties entered into the contract at a time when he/she lacked an understanding of what he/she was getting into. When one of the parties was intoxicated at the time of entering into the contract When one of the parties entered into the contract in reliance of a material misrepresentation (fraud).

Are there any other ways in which to provide a party with consideration other than by paying money to that party?

Yes.

Which of the following is an example where consideration is lacking?

Zola promised to do something that she already has a legal obligation to do under a contract she previously entered into. Zsa Zsa, the chief executive officer of the company you work for, makes the following proclamation at your company's year-end party: "All of you have worked hard, and if profits remain high, a 10% bonus at the end of the year will be given, as long as management thinks it is warranted" A mother says to her daughter: "In consideration of the fact that you are not as wealthy as your sisters, I will pay you $15,000."

Patrick agrees to pay Anna $25,000 in exchange for Anna taking Patrick's hazardous waste and surreptitiously dumping it on the property of a competitor. After Anna dumps the waste, Patrick refuses to pay. This contract will:

be void from the outset and thus unenforceable.

GavelCo Insurance sells an insurance policy to Barry in the state of Colorado. GavelCo violates a Colorado state statute when doing so. Later Barry gets into a dispute with GavelCo over coverage of the insurance policy and wants to enforce the insurance contract. The insurance contract will be:

enforceable by Barry, the purchaser, and he can recover from the insurer if applicable.

Consideration: Adequacy

involves "how much" consideration is given measuring whether bargain was fair Who decides if fair consideration was given? General Rule: Courts do not typically get involved in determining adequacy as long as consideration is legally sufficient Freedom of contract: Fundamental public policy recognizing one's ability to enter freely into contractual arrangements; courts rarely interfere with contracts that have been voluntarily made, although there are EXCEPTIONS: -Agreements involving illegal activities -Agreements that unreasonably restrain trade -Unfair contracts made between parties with uneven bargaining power Ex: Flight to Kalispell is more expensive than a flight to LA

Marcy owns a trucking company that hauls goods all over the country. Wilson contracts with Marcy's company to transport ten tractor-trailer loads of goods from Ohio to Texas. After delivery of the goods, Marcy learns that all the goods were stolen. The contract:

is enforceable, because Marcy's company was justifiably ignorant of the fact that the goods were stolen.

Daniel enters into a contract that requires him to pay interest at a rate greater than the legal state maximum. The contract might be enforceable if:

the loan is for a small amount and Daniel would not be able to obtain a loan otherwise.

Bryan tells his friend Jane, "I don't think it's fair that you don't have a cell phone and the rest of our friends do. In consideration of that unfairness, I will pay you $400 for you to buy a new phone." This contract is

unenforceable, because it is not a bargained-for exchange.

Jackie agrees to pay Ben $1,000 if Ben agrees to not go skydiving for six months. After Ben avoids skydiving for six months, he asks Jackie for payment. Jackie declines to pay Ben the $1,000. The contract between Jackie and Ben:

will be enforced because Ben exercised forbearance, which is legally sufficient consideration.

Amjed sues Larry, a landowner on whose property Amjed was injured. Larry believes that Craig is a lawyer and hires Craig to defend him in the lawsuit. Craig is not a lawyer, so the contract between Larry and Craig:

will not be enforced.