PPT 17: contractual capacity and legality

when can a minor disaffirm a contract?

1) at any time during minority or 2)for a reasonable time after minor reaches age of majority

what obligations are imposed on a minor who disaffirms a contract?

1) majority rule: in most states, minor need only return consideration received or goods in any condition, provided the goods are in minor's control 2)minority rule: in a minority of states, minor must return goods and also restore adult party to position held prior to contract

minor: as of what age is a young person treated as an adult for purposes of contract?

18

Fraud, Duress, Undue Influence

A party (Ann) who has been induced to enter a contract through fraud, duress, or undue influence exerted by the opposite party (Bill), the first party (Ann) will be allowed to recover for her performance or for the value of her performance.

Reilly, an adult, entered into a lease of band equipment (guitars, drums, amps, etc.) with a group of musicians, all of whom were 15 years old. Reilly, however, has just learned about problems associated with contracts with minors, and Reilly wants to disaffirm the contract. Would a court permit Reilly to disaffirm the contract? Yes No

B disaffirmance only applies to minors

contracts contrary to public policy

Contracts to Commit Immoral Acts; Business Contracts in Restraint of Trade;

effect of illegality

If a contract is ILLEGAL, neither party can sue the other for breach of contract, and neither can recover for performance rendered.

Severable (Divisible) Contracts

If a contract is divisible into legal and illegal portions (and each part can be performed separately, and each part is supported by separate consideration), a court may enforce only the LEGAL parts as long as the ILLEGAL parts do not change the essence of the bargain.

Members of a Protected Class

If a statute protects certain classes of people, members of the protected class can enforce an illegal contract (even though other party cannot.)

Justifiable ignorance of the facts

If one party is INNOCENT, court will not enforce the contract, but may permit the innocent party to recover benefits conferred to the other party.

Withdrawal from an Illegal Agreement

If the illegal part of a contract has not been performed, a party can withdraw and recover any performance given or its value.

effect of illegality exceptions

Justifiable ignorance of the facts; Members of a Protected Class; Withdrawal from an Illegal Agreement; Severable (Divisible) Contracts Fraud, Duress, or Undue Influence

in a majority of states, minor cannot disaffirm the following

Marriage Contracts; Contracts to enlist in Armed Forces; Contracts entered into after minor has been legally EMANCIPATED; Contracts for certain types of insurance (like car insurance) Contracts entered into by a minor who is engaged in business or trade as an adult

The state where Tyson lives requires all accountants to be licensed by the state. Joe said, "Tyson, I am a licensed accountant in your state," but this was a lie. (Tyson did nothing more to verify Joe's accounting license.) Tyson hired Joe to do accounting work and asked Joe to complete and file Tyson's currently due tax return. Joe failed to file Tyson's tax return. Considering the "general rule" in the previous slide, can Tyson sue Joe for breach of contract? Yes No

No J already unlicensed. T can sued for misrepresentation

mentally incompetent persons: valid

Person has NOT previously been declared incompetent Person HAD MENTAL CAPACITY to enter into a contract at the time the contract was formed

legality

The subject matter/purpose of a contract must be LEGAL for the contract to be valid and enforceable.

mentally incompetent persons: void/voidable

VOID: if individual who signed contracts has been previously declared incompetent and has a guardian VOIDABLE: if individual HAS NOT been declared incompetent but 1) did not know she was entering into a contract OR 2) could not understand the nature, purpose, and consequences of contract

ratification

acceptance or confirmation of an act or agreement that give legal force to an obligation that previously was not enforceable

Comedy Club failed to open the required number of clubs in years 2001 and 2002 (needed to open 8, but did not), so Improv terminated the contract. If Comedy Club sues Improv and claims the covenant not to compete ("non-comp" clause) was not reasonable, who would win? Comedy Club; Improv

comedy club, were limited to operating in only 2 states covenant not to compete because restraint on trade was too broad

before contract is fully executed the law changes and the purpose becomes illegal

contract is considered "discharged by law"

licensing statutes unlicensed practioners

contract is unenforceable: Contracts with UNLICENSED practitioners are illegal IF the PURPOSE of the state's licensing statute for those parties was created to PROTECT the public from unauthorized practitioners.

if contract purpose is illegal at time contract is formed

contract is void/ unenforceable

in a majority of states, a minor can disaffirm the following

contracts entered into by minor who lief about his/ her age

in a majority of states, a minor can disaffirm the following, but remains liable for the costs for the goods/services

contracts for necessaries/necessities

minors and implied ratification

executed contracts: presumed affirmed executory contracts: presumed disaffirmed

"Reasonableness" of Covenants Not to Compete primarily depends on limitations in:

geographic scope and duration

what type of contracts can a minor disaffirm?

most contracts

minors and parent's liabiltiy

parents are not liable for contracts made by minor who acts on his/her own exception: parents are liable for contracts for necessities

Joe bought a car from Stan's Toyota dealership. Joe has never been declared incompetent, but at the time he purchased the car, Stan noticed Joe was talking to "friends" in his head. Joe also seemed to carry on conversations with invisible entities, struck out violently with his hand aiming at nothing, and appeared agitated and "odd." Joe was later diagnosed with schizophrenia. Is it likely that Stan's contract with Joe is voidable? Probably Yes Probably No

prob yes

When Cassie was 17, she entered into a contract with Dan to purchase a computer. It is now one week after Cassie's 18th birthday. Can Cassie disaffirm her contract with Dan? Probably yes; No

probably yes, she entered the contract when she was a minor

public policy favors business competition therefore,

restraint of trade agreements are usually unenforceable

how can a minor disaffirm a contract?

show an intent not to be bound

contractual capacity

the capacity required by the law for a party who enters into a contract to be bound by that contract

disaffirmance (termination)

the legal avoidance, or setting aside, of a contractual obligation

a contract to do any act in the following list is void because the purpose if illegal

violate federal or state statutory law; commit a tortious act; commit an act contrary to public policy

in a majority of jurisdictions, a minor can enter into contracts but contract is ___ a option of minor

voidable

intoxicated persons - voidable contract

voidable at option of intoxicated persons: person must be able to return all consideration received

minors and ratification

when a minor reaches the age of majority, the minor can ratify any contract expressly or impliedly

contractual capacity: effects of

youth intoxication mental incompetence