Ch. 16 - Capacity and Legality

Legal Principles (5)

1. Any contracted entered into by a minor is voidable by the minor until they reach the age of majority or a reasonable time thereafter. 2. Contracts of a person with limited mental capacity can be valid, voidable, or void, depending on their ability to understand that they're entering a contract. 3. If the licensing statue is intended to just generate revenue, the contract of an unlicensed person is valid; if the purpose of the licensing statute is to protect the public's health/safety/welfare, then the agreement of an unlicensed person is illegal and unenforceable. 4. Covenants not to compete in conjunction with the sale of a business are generally enforceable if they are for a reasonable length of time and involve a reasonable location. 5. If the court can sever the illegal part of a contract from the illegal part, it will do so and enforce the legal part. If the contract is indivisible, then it will be unenforceable.

Parental Liability (2 + 1 Term)

1. Parents are not liable for contracts entered into by their children unless they cosign. 2. Parents have legal liability to provide basic necessities of life (food, clothing, shelter). Emancipation: When a minor's parents/legal guardians give up their right to exercise legal control over the minor.

Minors (4 Characteristics + 2 Exceptions)

1. These contracts are voidable. Must void the entire contract; cannot do a partial void. 2. Minors have the right to disaffirm or void their contracts. The adults they entered the contract with cannot do this, ONLY the minors can. 3. No formalities are required to disaffirm the contract, only intention to rescind it via words or actions. 4. Some states require that the minors need to compensate the other party if they return a damaged good. Exceptions: 1. Can't disaffirm contracts for life insurance, health insurance, psychological counseling, stock/bond transfers, bank accounts, education loan contracts, child support contracts, marriage contracts, and enlistment in the armed forces. 2. When they misrepresent their age and the other party relies on it. (In some states)

In Pari Delicto (Def + 2 Exceptions)

Both parties are equally responsible for the illegal agreement, disallowing any recovery from either party. 2 Exceptions: 1. One party belongs to a protected class and the agreement contradicts a statue intended to protect that specific class. Ex. If you're a truck driver you can't drive more than 8 hours a day, but if you do, you should be paid the extra time you drive. 2. When JUSTIFIABLE IGNORANCE OF FACTS leaves one party unaware of a provision of the agreement that would make it illegal.

When are contracts Illegal? (5)

CUUGS - Crime, Unlicensed, Usurious Loans, Gambling, Sunday Laws 1. Agreements to COMMIT A CRIME/TORT is illegal. 2. An UNLICENSED party cannot perform a task that is to protect the public health/safety/welfare. 3. Agreements regarding USURIOUS LOANS may be illegal in some states. These are loans given at interest rates exceeding the legal maximum. These are sometimes allowed for if a business needs a REALLY BIG loan, they shouldn't be denied the opportunity to borrow at high itnerest rates. 4. Agreements regarding GAMBLING are illegal in most states. 5. Agreements violating SABBATH/SUNDAY LAWS are illegal in some states. Ex. Sale of alcohol is limited, and in some states any contract made on Sunday is illegal. Typically not enforced.

Mentally Incapacitated Persons (3 + Insane)

Can have full, limited, or no legal capacity to enter into a binding contract depending on the ABILITY TO UNDERSTAND THE CONTRACT. Even if you have delusions, if you understand you're entering a contract, you can't disaffirm. If the delusions make it so you don't understand that you're entering a contract, it is voidable. Insane = No Capacity to enter contracts, and any contracts they enter are immediately void.

Covenants to Not Compete

Covenants not to compete in conjunction with the sale of a business are generally enforceable if they are for a reasonable length of time and involve a reasonable location. DETERMINED BY TIME & LOCATION.

Unconscionable Contracts/Clauses (Def, 2 Types)

Heavily one-sided agreements. The agreement in question is so unfair that it is VOID OF CONSCIENCE. 2 Types: Procedural and Substantive. Procedural Unconscionably: Conditions that impair one party's understanding of a contract, as well as the integration of terms into a contract. Ex. One party is less intelligent than the other, and the contract is very long and has excessive legalese (unnecessarily technical legal language). Adhesion Contract: An agreement presented on a take-it-or-leave-it basis or as the only chance they'll have to enter the contract. These are legal, but raise red flags on how voluntary entering the agreement really was. \\\\\\\\\\\\\\\ Substantive Unconscionably: When an agreement is overly harsh or lopsided, where one party gains vastly more than the other.

Dealing with Illegal Contracts (2 kinds)

If the court can sever the illegal part of a contract from the illegal part, it will do so and enforce the legal part. If the contract is indivisible, then it will be unenforceable. Severable Contract: Aka divisible contracts. Contain multiple parts that can each be performed separately and each have separate consideration. Indivisible Contract: Requires complete performance by both parties, even if it appears to contain multiple parts.

Ratification (Def + 2 Types)

Ratification: When a minor reaches majority age, they can ratify (legally affirm) contracts made as a minor, and they can't be voided. Express Ratification: The person orally/written states they intend to be bound by the contract that they entered into as a minor. Implied Ratification: When the person makes action consistent with with intent to ratify the contract.

Capacity (2)

The mental ability to understand rights and obligations under a contract, and therefore can comply with their terms. Incapacity/Incompetence: A mental/physical defect that prevents a natural person from being able to enter into a legally binding contract.

Exculpatory Clause (Def + Example)

The release one of the parties from all liability, regardless of who is at fault or what injury happens. If the enforcing party engages in a business directly related to public interest (banks, transportation, public utility), they are held accountable because they have a position of power. "Businesses serving public interest should be accountable for the public they serve."

Intoxication (When Voidable, Enforceable, and Becoming Sober)

VOIDABLE: Contracts of a drunk person are voidable if the OTHER PARTY knew that intoxication rendered the person unable to understand the nature/consequences of the transaction. But if intoxication causes someone to have POOR JUDGEMENT, they still have capacity since they knew they were entering a contract. ENFORCEABLE: If the other party had no idea that the person was drunk, and the contract is reasonable, then courts will uphold. BECOMING SOBER: When they become sober, they can ratify/disaffirm contract but its up to the courts to decide, case-by-case, but generally courts do not favor the drunks. Ex. Lisa e-mails Rob to buy his antique car for $5k, and he drunkenly emails back "yes", courts will uphold.