Ch 14: Capacity and Legality

IF a court has previously determined that a person is mentally incompetent, any contract made by that person is [void/voidable/valid].

IF a court has previously determined that a person is mentally incompetent, any contract made by that person is *void*.

Express Ratification

*Express ratification* takes place when the individual, on reaching the age of majority, states orally or in writing that he or she intends to be bound by the contract.

[DEFINE] Gambling

*Gambling* is the creation of risk for the purpose of assuming it.

[DEFINE] Implied Ratification

*Implied ratification* takes place when the minor, on reaching the age of majority, indicates an intent to abide by the contract.

Is a contract with an unlicensed person legal and enforceable?

*It depends*. - If the statute's purpose is to protect the public from unauthorized practitioners (such as unlicensed attorneys and electricians), then a contract involving an unlicensed practitioner is generally illegal and unenforceable. - If the statute's purpose is merely to raise government revenues, however, a court may enforce the contract and fine the unlicensed person.

Are parents liable for contracts made by their minor children?

*No.* (Unless the parent is acting as a cosigner.)

Can a minor disaffirm a contract in part?

*No.* If a minor chooses to disaffirm a contract, the minor must disaffirm the entire contract.

Is a contract to commit a tortious act (such as an agreement to engage in defamation or fraud) enforceable?

*No.* It is contrary to public policy and therefore illegal and unenforceable.

Is a contract to do something that is prohibited by federal or state statutory law enforceable?

*No.* It is illegal and, as such, void and unenforceable.

Are gambling contracts valid?

*No.* These contracts are void.

Can a minor return damaged goods as a way to fulfill his or her obligation to disaffirm a contract?

*Yes.* The minor is entitled to disaffirm the contract and obtain a full refund of the purchase price (possibly subject to a duty of restitution). Recall Prof. Green's example of the totaled car.

Contracts contrary to public policy include...

- Contracts in restraint of trade - Unconscionable contracts or clauses

What circumstances may terminate minority status?

- Emancipation - Marriage (in some states)

When does implied ratification of a contract entered into by an intoxicated person occur?

- Implied ratification occurs when a person enters into a contract while intoxicated and fails to disaffirm the contract within a reasonable time after becoming sober. - Acts or conduct inconsistent with an intent to disaffirm-—such as the continued use of property purchased under a voidable contract-—will also normally ratify the contract.

What are some exceptions to the enforceability/ recovery of an illegal contract?

- Justifiable Ignorance of the Facts - Members of protected classes - Withdrawal form an Illegal Agreement - Contract Illegal through Fraud, Duress, or Undue Influence - Severable, or Divisible, Contracts

Exceptions to a Minor's Right to Disaffirm

- Marriage contracts - Contracts to enlist in the military - Contracts entered into by a minor engaged in business as an adult (lying about age) - Contracts for necessaries: basic needs such as food, clothing, shelter, and medical services

What are the minors' obligations on disaffirmance?

- returning the goods (or other considerations) subject to the contract

Noncompete agreements are legal in most states if....

- the specified period of time (of restraint) is not excessive in duration - the geographic restriction is reasonable

In almost all states, what is the age of majority?

18

[DEFINE] 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.

Disaffirmance within a Reasonable Time

A contract can ordinarily be disaffirmed at any time during minority or for a reasonable time after the minor reaches the age of majority.

[DEFINE] Unconscionable Contract or Clause

A contract or clause that is void on the basis of public policy because one party is forced to accept terms that are unfairly burdensome and that unfairly benefit the dominating party.

[DEFINE] Reformation

A court-ordered correction of a written contract so that it reflects the true intentions of the parties.

Duty of Restitution

A rule that states that if a minor is returning property or other valuables to the adult party before disaffirming the contract, the minor may be responsible for damage, ordinary wear and tear, and depreciation of goods that the minor used prior to disaffirmance.

How do most states treat usurious contracts?

Although usurious contracts are illegal, most states simply limit the interest that the lender may collect on the contract to the lawful maximum interest rate in that state. In a few states, the lender can recover the principal amount of the loan but no interest.

Is an adult in a contract with a minor still bound to their contractual duties?

An adult who enters into a contract with a minor cannot avoid his or her contractual duties on the ground that the minor can do so. Unless the minor exercises the option to disaffirm the contract, the adult party normally is bound by it.

Under what circumstances is a contract entered into by an intoxicated person considered ratified?

An intoxicated person, after becoming sober, may ratify a contract expressly or impliedly.

[DEFINE] Usury

Charging an illegal rate of interest.

Are contracts made by mentally incompetent persons enforceable?

Contracts made by mentally incompetent persons can be void, voidable, or valid.

Contracts that are not enforceable because of the negative impact they would have on society are said to be ____.

Contracts that are not enforceable because of the negative impact they would have on society are said to be *contrary to public policy*.

When do courts enforce exculpatory clauses?

Courts enforce exculpatory clauses if... - they are reasonable - do not violate public policy - do not protect parties from liability for intentional misconduct - the language used is NOT ambiguous - the parties have relatively equal bargaining positions

Substantive Unconscionability

Exists when a contract, or one of its terms, is oppressive or overly harsh

If a contract is voidable because one party was intoxicated, what are their options to avoid liability?

If a contract is voidable because one party was intoxicated, that person has the option of disaffirming it while intoxicated and for a reasonable time after becoming sober.

If a court has not previously judged a person to be mentally incompetent but the person was incompetent at the time the contract was formed, the contract may be [void/ voidable/ valid].

If a court has not previously judged a person to be mentally incompetent but the person was incompetent at the time the contract was formed, the contract may be *voidable*.

If a mentally ill person (not previously declared incompetent) has capacity at the time the contract was formed, the contract may be [void/ voidable/ valid].

If a mentally ill person (not previously declared incompetent) has capacity at the time the contract was formed, the contract may be *valid*.

If an illegal contract is executory, what happens?

If an illegal contract is executory, *neither party can enforce it.

Under what circumstances is a contract entered into by an intoxicated person voidable?

If the person was sufficiently intoxicated to lack mental capacity, then the agreement may be voidable even if the intoxication was purely voluntary.

Under what circumstances is a contract entered into by an intoxicated person valid?

If, despite intoxication, the person understood the legal consequences of the agreement, the contract will be enforceable.

[DEFINE] Emancipation

In regard to minors, the act of being freed from parental control; occurs when a child's parent or legal guardian relinquishes the legal right to exercise control over the child.

Is a contract entered into by an intoxicated person enforceable?

It can be either voidable or enforceable (valid).

If an illegal contract has been executed, what happens?

Neither party can recover damages (barring certain exceptions).

Procedural Unconscionability

Occurs if a contract is entered into, or a term becomes part of the contract, because of a party's lack of knowledge or understanding of the contract or the terms - Also can occur when there is such disparity in bargaining power between the two parties that the weaker party's consent is not voluntary.

What happens to the adult party when the minor disaffirms their contract?

On disaffirming a contract, a minor normally can recover any property that he or she transferred to the adult as consideration, even if the property is in the possession of a third party.

[DEFINE] Ratification

The act of accepting and giving legal force to an obligation that previously was not enforceable.

[DEFINE] Age of Majority

The age at which an individual is considered legally capable of conducting himself or herself responsibly and is entitled to vote. In contract law, the age at which one is no longer an infant and *can no longer disaffirm a contract*.

What happens if the performance of contract is rendered illegal by a statute *after* the parties entered into the contract?

The contract is terminated by the law.

What types of contracts can minors enter into?

The general rule is that a minor can enter into any contract that an adult can, except contracts prohibited by law for minors (such as contracts to purchase tobacco or alcoholic beverages).

[DEFINE] Contractual Capacity

The legal ability to enter into contracts; the threshold mental capacity required by law for a party who enters into a contract to be bound by that contract

[DEFINE] Disaffirmance

The legal avoidance, or setting aside, of a contractual obligation.

Are contracts entered into by minors enforceable?

They are voidable at the option of the minor.

How does a minor exercise the option to avoid a contract?

To exercise the option to avoid a contract, a minor need only manifest (clearly show) an intention not to be bound by it. The minor "avoids" the contract by disaffirming it.

If a minor fails to disaffirm a contract within a reasonable time after reaching the age of majority, how does the court view the contract?

Typically, courts presume that executed contracts are ratified and that executory contracts are disaffirmed.

When are contracts or clauses which restrain trade typically enforced?

When the restraint is reasonable and is contained in an ancillary (secondary or subordinate) clause in a contract.

Is one's conduct enough for a minor to disaffirm a contract?

Yes, a minor must express his or her intent, through words or conduct, not to be bound to the contract.