Chapter 16 Business Law- Exam 2

Effect of Illegal Agreements

1. Rule: Illegal agreements are void 2. If both parties are equally responsible for an illegal agreement, it is known as - in pari delicto

3 ways states handle usury:

1. Some states will say that you can't collect the amount above the legal interest rate 2. Can't collect any interest at all. You can get the principal back but not the interest 3. Can't collect the interest or principal. The contract is void. This is the harshest one, the one with the highest deterrent.

Licensing Statues: 3 purposes

1.) Give the government some control over which people, and how many people, can perform certain jobs 2.) By charging for licenses, the government can obtain revenue. (To generate revenue) 3.) The protection of the public's health, safety, and welfare. Ex- law, medicine, contractors that do electrical

Covenants Not to Compete (restrictive covenants)

A lot of times a company will want you to sign this so that you can't go work for a competitor and sell the companies secret information. Convents not to compete is temporary for a reasonable time, in a geographic location. This is illegal in California for employment contracts.

Liability of minors for necessities

A necessity of life, generally including food, clothing, shelter, and basic medical services. Minors can disaffirm contracts for necessaries but will still be held liable for the reasonable value of the necessary

Legal capacity

A person who has legal capacity has the mental ability to understand his or her rights and obligations under a contract and therefore, presumably, to comply with terms

Case: Min v. Waters

A woman had been in an accident when she was a child and she had some head injuries. She had some limited mental capacities. She ended up getting some type of award from a lawsuit. Got an annuity (you buy them upfront and the money is spread out over time with interest). The woman ends up dating a guy who is an ex-con criminal. He convinces her to sell the annuity. He purchases it for 50,000 and her annuity was worth 800,000. She did not understand what the guy was taking from her. the guy took advantage of her (drugs). The agreement was very one-sided. The sale of the agreement was unconscionable. The woman got the annuity returned to her. Example of unconscionable contracts or clauses.

Legal Principle

As a general rule, any contract entered into by a minor is voidable by the minor until he or she reaches the age of majority or a reasonable time thereafter

Contracts in Restraint of Trade

Competition drives down prices, which is good for consumers. Therefore, you can't pay someone not to compete with you. Then you would be like a monopoly, which you cannot do

Adhesion contract(Unconscionable contracts or clauses)

Isn't illegal per say but it is presented on a take it or leave it basis. You can't make any edits or negotiate any terms. But potentially illegal depending on various factors.

Exculpatory clause

It says that you are doing it at your own risk. Even if the company is responsible you can't hold them accountable. You can release yourself from ordinary negligence. What it doesn't excuse is gross negligence or if you do something on purpose then it is not enforceable

Sabbath (Sunday, or blue laws)

Limit the types of business activities in which parties can legally engage on Sunday. Certain places in the world Sabbath laws are still in places. Not usually in the U.S

Usury

Loans made above the legal interest rate

Disaffirmance of the Contracts:

Minors have the right, until a reasonable time after reaching the age of majority, to disaffirm or void their contracts. The minor has the right to disaffirm, not the adult whom the minor entered into the agreement.

If one person has no way of knowing the other is intoxicated

and if the agreement is a fair one, most courts will uphold it.

Substantive unconscionability (Unconscionable contracts or clauses)

Overly harsh terms of the agreement is very lopsided- favors one side over the other

Intoxicated Persons

Persons under the influence of drugs or alcohol

Agreements in Contradiction to Public Policy

Some types of agreements are not illegal (not in violate of any statute or legal code), but are nevertheless unenforceable because courts have deemed them to be against public policy. The focus is what is "in society's best interest".

Exceptions to minor's right to disaffirm the contract

The minor's right to disaffirm is designed to protect the minor from competent parties who might otherwise take advantage of him or her. The minor should not have the right to disaffirm contracts for life insurance, health insurance, psychological counseling, the performance of duties related to stock and bond transfer and bank accounts, education loan contracts, child support contracts, marriage contracts, and enlistment in the armed services.

Incapacity/ Incompetence

The possession of a mental or physcial defect that prevents a natural person from being able to enter into a legally binding contract. Could have: no capacity, limited capacity, or the ability to form only voidable contracts (minors)

Procedural unconscionability (Unconscionable contracts or clauses)

Things like tiny, hard to read print on the back of an agreement. excessive legalese- language of the law, not using plan ordinary English. No ability to either read or ask questions before signing the contract.

UCC 2-302 (Unconscionable contracts or clauses)

UCC- applies to the sale of goods. (Merchant to merchant). If the contract or clause of a contract is unconscionable at the time the contract is made the court can choose to not enforce the whole thing, only enforce the parts that are ok (partial), or that they need to hear evidence before they make a decision. (applies to all states except California and Louisiana))

Unconscionable contracts or clauses

When agreements are so one sided that they harm one of the parties. That person is unable to fulfill their contractual duties. If an agreement that is not illegal per say, but it is against public policy (it is against societies best interest).

Exceptions of Illegal Agreements

When one party is not responsible for an illegal agreement; or special circumstances warrant forgiving the illegality 1. When a member of a protected class is involved in an agreement that contradicts a statute designed to protect that class. Ex- truck driver 2. The court takes the stance that if one party is relatively innocent and the other party is much more to blame then the parties both return to the positions they were before the contract. (as if no deal was ever made) 3. One party withdraws before an illegal agreement was made.

In most states, parents are NOT liable for

a minor's personal torts

Agreements to...

commit a crime or tort (private wrongs). These are void. They are not capable of being enforced

Severable contracts (divisible contracts)

contain multiple parts that can each be performed separately and for which separate consideration is offered If one part of the contract was illegal but the rest was legal. Then the part that is illegal would be cut out and the rest of the legal contracts would be enforced. Determines if a contract is going to fail or be enforced based on if there is one part that is bad

Compromise

either by requiring that the minor restore the competent party to that party's precontract position before allowing the disaffirmance or by allowing the minor to disaffirm but then give the competent party the right to sure the minor in tort and recover damages for fraud.

Courts are NOT sympathetic to intoxicated parties and will...

fairly liberally interpret behavior that seems like ratification as ratifying the contract

Rule: When a licensing statute is designed merely to

generate revenue, then the contract of an unlicensed person is valid. To raise revenue, a contract made by an unlicensed person, the contract is still enforceable

Disaffirmance of the Contracts: rules vary by state. A number of states

have modified the duty of the minor on disaffirmance, holding that the minor has a duty of restitution, requiring that she or he place the competent party back in the position that party was in at the time the contract was made.

Limited Capacity

if a person suffers from a mental illness or deficiency that prevents them from understanding the nature and obligations of the transaction.

Limited Capacity: Valid

if a person suffers from delusions that may impair his judgement but he can still understand that he is entering into a contract and understand his obligations under the contract

Mentally Incapacitated Persons

if a person suffers from mental problems, but still understands the nature of the contract and the obligations imposed by it, then the person may enter into a binding legal agreement.

Limited Capacity: void

if he/she has been adjudicated insane

Limited Capacity: voidable

if his delusions prevent him from understanding that he is entering into a contract or the nature and extent of his obligations under the contract, his contract is voidable

Misrepresentation of age - the majority rule

is that a minor's misrepresentation of age does not affect the minor's right to disaffirm the contract.

Capacity

is the third element of a legally binding contract

If a minor appears to be of age

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.

Emancipation

occurs when a minor's parents or legal guardians give up their right to exercise legal control over the minor, typically when the minor moves out of the parent's house and begins supporting themselves. When a minor marries, they are usually considered emancipated.

Implied ratification

occurs when the former minor takes some action after reaching the age of majority consistent with intent to ratify the contract

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.

Ratification

once a person reaches the age of majority, he or she may ratify, or legally affirm, contracts made as a minor. Once ratified, the contract is no longer voidable

Parent's Liability for their Children's Contracts, Necessaries, and Torts. General rule:

parents are not liable for contracts entered into by their minor child.

Rule: When a licensing statute is designed to

protect the public's health, safety, and welfare, the agreement of an unlicensed person is typically deemed illegal and unenforceable

Parents do have a legal duty to:

provide their children with the basic necessities of life, such as food, clothing , and shelter.

Gambling

refers to agreements in which parties pay consideration (money placed during bets) for the chance, or opportunity, to obtain an amount of money or property You can gamble a few places, but for the most part gambling is illegal, but there are a few exceptions such as horse races

Indivisible contracts

requires complete performance by both parties, even if it appears to contain multiple parts. If one part fails, it all fails.

Disaffirmance of the Contracts: rules vary by state. Most states:

simply required the minor to notify the competent party and return any consideration received, regardless of its condition

Minors

someone under the age of 18 (however, a person is given full legal capacity to enter into contracts when he or she becomes emancipated before reaching the age of majority)

Intoxicated Persons: Majority of states

the contracts of an intoxicated person are voidable if the other party had reason to know that intoxication rendered the person unable to understand the nature and consequences of the transaction or unable to act in a reasonable manner in relation to the transaction.

Disaffirmance of the Contracts: rules vary by state. If the consideration has been destroyed/damaged

the other party had no recourse against the minor.

Once sober

the previously intoxicated person has the ability to either ratify or disaffirm the contract.

Legality

to be enforceable, contracts must have legal subject matter and be able to be formed legally. They cannot violate state or federal law

Rule: Contracts of a person with limited mental capability can be

valid, voidable, or void, depending on the extent of the mental incapacity