Chapter 14 Business Law

4. Tyrone, who is 17 years old, shows a false ID to the loan officer at First Bank. Believing that Tyrone is of legal age, the bank officer gives him a $10,000 loan to buy a used sports car. Tyrone defaults on the loan two months later, after the car has been destroyed in a collision. Tyrone, who is still 17, informs the bank that he has decided to avoid the contract. What are Tyrone's rights? What are the bank's rights?

States do not agree whether a minor who misrepresents his age has the power to disaffirm a contract. Under the prevailing view, Tyrone may disaffirm the contract. However, some states would not allow Tyrone to disaffirm if the bank officer in good faith relied upon the misrepresentation.

Guardianship

void the relationship underwhich the guardian is appointed by the court to preserve and control the property of another (the ward)

8. One does not possess sufficient contractual capacity to enter into a contract if it is shown that he is: a. slightly intoxicated. b. intoxicated and unable to understand the nature and consequences of his acts. c. both of the above. d. none of the above.

B

3. A contract entered into by a minor is: a. voidable at the election of the minor only. b. voidable at the election of the other party only. c. voidable at the election of either. d. voidable only if it is executory.

A

11. Which of the following is NOT true with regard to necessary items? a. A car can be a necessary item. b. A contract for medical care can be avoided. c. What is necessary will vary from person to person. d. The liability for necessary items will be the reasonable value of the items, which may differ from the contract amount.

B

5. If a minor purchases a car and then continues to use it for one year after obtaining majority, this action constitutes: a. a disaffirmance of the contract. b. a ratification of the contract. c. a breach of the contract. d. none of the above.

B

12. When can a minor disaffirm a contract? a. Only before reaching the age of majority b. At any time after reaching the age of majority c. At any time either prior to or immediately after reaching the age of majority d. None of the above

C

14. CPA: Meed entered into a written agreement to sell a parcel of land to Beel for $80,000. At the time the agreement was executed, Meed had consumed a large amount of alcohol which significantly impaired Meed's ability to understand the nature and terms of the contract. Beel knew Meed was very intoxicated and that the land had been appraised at $125,000. Meed wishes to avoid the contract. The contract is: a. void. b. legally binding on both parties in the absence of fraud or undue influence. c. voidable at Meed's option. d. voidable at Meed's option only if the intoxication was involuntary.

C

4. In a contract for necessaries, a minor is liable for: a. the list price of the items furnished. b. the agreed price of the items furnished. c. the reasonable value of the items furnished. d. the wholesale cost of the items furnished.

C

1. Which of the following would lack contractual capacity? a. Bill, who is 16, wants to buy a speedboat. b. Sara, who has been adjudicated mentally incompetent, buys a fur coat. c. Richard, who is seriously intoxicated, agrees to sell his car. d. All of the above.

D

10. Which of the following would constitute an effective ratification? a. Ratification through express language b. Ratification through conduct c. Ratification through failure to make a timely disaffirmance d. Any of the above

D

13. Martha, who is a minor, contracts with Alice, who is an adult. a. Alice may disaffirm the contract at any time. b. Alice may disaffirm the contract when Martha becomes an adult. c. Alice may ratify the contract when Martha reaches the age of 18. d. Alice may not disaffirm the contract.

D

15. CPA: On May 1, 2008, Mint, a 16-year-old, purchased a sailboat from Sly Boats. Mint used the boat for six months, at which time he advertised it for sale. Which of the following statements is correct? a. The sale of the boat to Mint was void, thereby requiring Mint to return the boat and Sly to return the money received. b. The sale of the boat to Mint may be avoided by Sly at its option. c. Mint's use of the boat for six months after the sale on May 1 constituted a ratification of that contract. d. Mint may disaffirm the May 1 contract at any time prior to reaching majority.

D

2. Which of the following would be required of a minor who disaffirms her contract? a. She must return any property she has received from the other party, provided it is in her possession. b. She must pay a reasonable amount for the use of the property. c. She must make restitution. d. All of the above are possible depending on the jurisdiction.

D

6. A minor may disaffirm a contract for personal property: a. before attaining majority. b. on the day of attaining majority. c. within a reasonable time after reaching majority. d. all of the above.

D

7. A person who lacks sufficient mental capacity to enter into a contract is one who is: a. adjudicated incompetent by a court decree. b. incompetent, although not adjudicated as such by a court decree. c. unable to understand the nature and effect of her acts. d. all of the above.

D

9. Which of the following is/are liable in quasi-contract for necessaries furnished to them during their incapacity? a. Emancipated minors b. Persons incompetent but not so adjudicated c. Intoxicated persons d. All of the above

D

Contractual Capacity

Everyone is regarded as having contractual capacity some are legally limited in it: minors, incompotent, intoxicated

9. In order to prove that a person with a mental defect lacks the necessary capacity to enter into a contract, it must be shown that the person is permanently insane.

False just must not be able to understand the nature and effect of items

8. If a tort and a contract are so connected that to enforce the tort action the court must enforce the minor's contract, the court will enforce the contract and the minor will be liable in tort.

False, because they are so interwoven they cannot enforce the contract

12. A minor who contracts for a necessary will be liable for the full contract price.

False, reasonable value

13. Seventeen-year-old Tim Teenager has just completed a course in business law. He now wants to disaffirm his student loan agreements. Most states allow a minor to avoid contracts for student loans.

False, you cannot

1. Indicate the classes of persons lacking contractual capacity and the effect of that incapacity.

Generally, all persons are regarded as having capacity to contract unless specifically designated otherwise. Minors, incompetent persons, and intoxicated persons are limited to some extent. Minors' contracts are voidable at the option of the minor. If one has been adjudicated incompetent and a guard¬ian appointed, contracts entered into by the incompetent are void. One not so adjudicated but who is nevertheless unable to understand the nature and consequence of his acts or one who cannot understand the nature and consequence of her actions due to intoxication, entered into voidable contracts.

2. Explain a minor's liability for necessaries.

Not all contracts entered into by minors are voidable. Where minors contract for a necessary, they will be held liable for the reasonable value of the item contracted for. Today the courts generally define "necessaries" as those things that the minor needs to maintain himself in his particular station in life.

3. Discuss ratification and how it may be accomplished.

The act of ratification makes the contract binding, and if properly ratified a contract may not thereafter be disaffirmed. Ratification may occur in three ways: (1) through express language, (2) as implied from conduct, and (3) through failure to make a timely disaffirmance.

5. Don, who is mentally incompetent, enters into a contract with Lucy Landowner to purchase some land. Discuss the enforceability of the contract. If Don has been adjudicated incompetent by a court and enters such a contract, what would the result be?

The contract between Don and Lucy is voidable at the option of Don if he is unable to comprehend the subject of the contract, its nature, and its probable consequences. If Don has been adjudicated incompetent by a court, the contract is void and has no legal effect.

1. As a general rule, a contract entered into by a minor is voidable at the minor's option.

True

11. To avoid a contract, an intoxicated person must act promptly, upon regaining capacity, to disaffirm.

True

14. Under the traditional cognitive ability test, a person is mentally incompetent if unable to comprehend the subject of the contract, its nature, and its probable consequences.

True

15. In determining contractual capacity under the cognitive ability test, individuals who are taking prescribed medication are treated the same as those who are incompetent.

True

2. Recovery for necessaries furnished to a minor is based upon the reasonable value of the item furnished and not the contract price.

True

3. A minor has the option of ratifying a contract after reaching majority, which makes the contract binding from the beginning.

True

4. Except in the case of a contract to transfer land, a minor can disaffirm a contract before attaining majority or within a reasonable time thereafter

True

5. Disaffirmance may be either express or implied.

True

6. Under the Code, a person buying goods from a minor has the power to transfer valid title to the goods to a good faith purchaser for value.

True

7. In most states, minors who fraudulently misrepresented their age at the time a contract was entered into may nevertheless disaffirm the contract.

True

10. A person may be able to avoid a contractual agreement even though she understands what she is doing but cannot control her behavior, thereby failing to act in a reasonable or rational way.

True (In the restatements)

Necessaries

a minor/all with limited capacity liable for the reasonable value of necessary items these are the items that reasonably supply a person's needs

Ratification

affirmation of a contract

Disaffirmance

avoidance of a contract

Minor

person under the age of legal majority contracts are voidable cannot ratify until 18 can disaffirm at any time unless it is land, then can't disaffirm until reach age of legal majority

Liability of misrepresentation of age

prevailing view is that a minor may disaffirm the contract

Mentally incompetent

unable to understand the nature and effect of one's acts