BUSINESS LAW CH 14
Contracts in Restraint of Trade
-The United States has a strong public policy favoring competition in the economy -Thus, contracts in restraint of trade (anticompetitive agreements) generally are unenforceable because they are contrary to public policy -Typically, such contracts also violate one or more federal or state antitrust statutes -An exception is recognized when the restraint is reasonable and is contained in an ancillary (secondary or subordinate) clause in a contract -Such restraints often are included in contracts for the sale of an ongoing business and for employment contracts -covenants not to compete and the sale of an ongoing business -covenants not to compete in employment contracts -enforcement issues
Substantive Unconscionability
-(blank) unconscionability occurs when contracts, or portions of contracts, are oppressive or overly harsh -Courts generally focus on provisions that deprive one party of the benefits of the agreement or leave that party without a remedy for non-performance by the other -can arise in a wide variety of business contexts
Contracts to Commit a Crime
-Any contract to commit a crime is in violation of a statute -thus, a contract to sell illegal drugs in violation of criminal laws is unenforceable, as is a contract to hide a corporation's violation of securities laws or environmental regulations -Sometimes, the object or performance of a contract is rendered illegal by a statute after the parties entered into the contract -In that situation, the contract is considered to be discharged (terminated) by law
Parents' Liability
-As a general rule, parents are not liable for contracts made by minor children acting on their own, except contracts for necessaries, which parents are legally required to provide -As a consequence, businesses ordinarily require parents to cosign any contract made with a minor -The parents then become personally obligated under the contract to perform the conditions of the contract, even if their child avoids liability
Unconscionable Contracts or Clauses
-Contracts in Restraint of Trade -A court ordinarily does not look at the fairness or equity of a contract (or inquire into the adequacy of consideration) -Persons are assumed to be reasonably intelligent, and the courts will not come into their aid just because they have made unwise or foolish bargains -In certain circumstances, however, bargains are so oppressive that the courts relieve innocent parties of part or all of their duties -Such bargains are deemed unconscionable because they are so unscrupulous or grossly unfair as to be "void of conscience" -A contract can be unconscionable on either procedural or substantive grounds
Discriminatory Contracts
-Contracts in Restraint of Trade -Contracts in which a party promises to discriminate on the basis of race, color, national origin, religion, gender, age, or disability are contrary to both statute and public policy -They are also unenforceable
Exculpatory Clauses
-Contracts in Restraint of Trade -release a party from liability in the event of monetary or physical injury no matter who is at fault -Often closely related to the concept of unconscionability -Indeed, courts sometimes refuse to enforce such clauses on the ground that they are unconscionable
Mental Incompetence
-Contracts made by mentally incompetent persons can be void, voidable, or valid
When Courts Will Enforce Exculpatory Clauses
-Courts do enforce exculpatory clauses if they are reasonable, do not violate public policy, and do not protect parties from liability for intentional misconduct -The language used must not be ambiguous, and the parties must have been in relatively equal bargaining positions
Justifiable Ignorance of the Facts
-Sometimes, one of the parties to a contract has no reason to know that the contract is illegal and thus is relatively innocent -That party can often recover any benefits conferred in a partially executed contract -In this situation, the courts will not enforce the contract but will allow the parties to return to their original positions -Sometimes, a court may permit an innocent party who has fully performed under the contract to enforce the contract against the guilty party
Contracts Contrary to Statute
-Statutes set forth rules specifying what may be included in contracts and what is prohibited ways in which contracts may be contrary to statute and thus illegal: -Contracts to commit a crime -usury -gambling -licensing statutes
Procedural Unconscionability
-(blank) unconscionability often involves inconspicuous print, unintelligible language ("legalese"), or the lack of an opportunity to read the contract or ask questions about its meaning -This type of unconscionability typically arises when a party's lack of knowledge or understanding of the contract terms deprived him or her of any meaningful choice -Can also occur when there is such disparity in bargaining power between the two parties that the weaker party's consent is not voluntary -This type of situation involves an adhesion contract, which is a contract written exclusively by one party and presented to the other on a take-it-or-leave-it basis -In other words, the party to whom the contract is presented (usually a buyer or borrower) has no opportunity to negotiate its terms
Disaffirmance within a Reasonable Time
-A contract can ordinarily be disaffirmed at any time during minority or for a reasonable period after the minor reaches the age of majority -What constitutes and to what extent the contract has been performed
Severable, or Divisible Contracts
-A contract that is severable, or divisible, consists of distinct parts that can be performed separately, with separate consideration provided for each party -With an indivisible contract, in contrast, complete performance by each party is essential, even if the contract contains a number of seemingly separate provisions -If a contract is divisible into legal and illegal portions, a court may enforce the legal portion but not the illegal one, so long as the illegal portion does not affect the essence of the bargain -This approach is consistent with the courts' basic policy of enforcing the legal intentions of the contracting parties whenever possible -A contract clause stating that the parties intend the contract terms to be enforced to "the fullest extent possible" indicates that the parties regard their contract as divisible -In the event of a dispute, the parties intend that the court will strike out the illegal terms and enforce the rest
Usury
-A lender who makes a loan at an interest rate above the lawful maximum commits -Almost every state has a statute that sets the maximum rate of interest that can be charged for different types of transactions, including ordinary loans -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 -In addition, states can make exceptions to facilitate business transactions -For instance, many states exempt corporate loans from the usury laws, and nearly all states allow higher-interest-rate loans for borrowers who could not otherwise obtain loans
Licensing Statutes
-All states require members of certain professions—including physicians, lawyers, real estate brokers, accountants, architects, electricians, and stockbrokers—to have licenses -Some licenses are obtained only after extensive schooling and examinations, which indicate to the public that a special skill has been acquired -Others require only that the applicant be of good moral character and pay a fee -Whether a contract with an unlicensed person is legal and enforceable depends on the purpose of the licensing statute -if the statute's purpose is to protect the public from authorized practitioners (such as unlicensed attorneys or 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
Minor's Obligations on Disaffirmance
-Although all states' laws permit minors to disaffirm contracts, states differ on the extent of a minor's obligations on disaffirmance -Courts in most states hold that the minor need only return the goods (or other consideration) subject to the contract, provided the goods are in the minor's possession or control -Even if the minor returns damaged goods, the minor often is entitled to disaffirm the contract and obtain a full refund of the purchaser price -A growing number of states place an additional duty of restitution on the minor to restore the adult party to the position she or he held before the contract was made -These courts may hold a minor responsible for damage, ordinary wear and tear, and depreciation of goods that the minor used prior to disaffirmance
Contracts Contrary to Public Policy
-Although contracts involve private parties, some are not enforceable because of the negative impact they would have on society -Examples include a contract to commit an immoral act, such as selling a child, and a contract that prohibits marriage Business contracts that may be against public policy include: -contracts in restraint of trade -unconscionable contracts or clauses -exculpatory clauses -discriminatory clauses
Ratification (Intoxication)
-An intoxicated person, after becoming sober, may ratify a contract expressly or impliedly, just as a minor may do on reaching majority -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 ratify the contract
Exceptions to a Minor's Right to Disaffirm
-For public-policy reasons, some contracts, such as marriage contracts and contracts to enlist in the armed services, cannot be avoided -In addition, although ordinarily minors can disaffirm contracts even when they have misrepresented their age, a growing number of states have enacted laws to prohibit disaffirmance in such situations -Other states prohibit disaffirmance by minors who misrepresented their age (fraud) while engaged in business as an adult -Finally, a minor who enters into a contract for necessaries may disaffirm the contract but remains liable for the reasonable value of the goods -Necessaries are basic needs, such as food, clothing, shelter, and medical services -What is necessary for one minor, however, may be a luxury for another, depending on the minors' customary living standard -Contracts for necessaries are enforceable only to the level of value needed to maintain the minor's standard of living
Gambling
-Gambling is the creation of risk for the purpose of assuming it -Any scheme that involves the distribution of property by chance among persons who have paid valuable consideration for the opportunity (chance) to receive the property is gambling -Traditionally, the states deemed gambling contracts illegal and thus void -Today, many states allow (and regulate) certain forms of gambling, such as horse racing, video poker machines, and charity-sponsored bingo -In addition, nearly all states allow state-operated lotteries and gambling on Native American reservations -Even in states that permit certain types of gambling, though, courts often find that gambling contracts are illegal
Disaffirmance (Intoxication)
-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 -The person claiming intoxication typically must be able to return all consideration received unless the contract involved necessaries -Contracts for necessaries are voidable, but the intoxicated person is liable in quasi contract for the reasonable value of the consideration received
When the Contract will be Voidable (Mental Incompetence)
-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 -The contract is voidable if the person did not know he or she was entering into the contract or lacked the mental capacity to comprehend its nature, purpose, and consequences -In such situations, the contract is voidable (or can be ratified) at the option of the mentally incompetent person but not at the option of the other party
When the Contract will be Void (Mental Incompetence)
-If a court has previously determined that a person is mentally incompetent, any contract made by that person is void—no contract exists -On determining that someone is mentally incompetent, the court appoints a guardian to represent the individual -Only the guardian can enter into binding legal obligations on behalf of the mentally incompetent person
Withdrawal from an illegal Agreement
-If the illegal part of a bargain has not yet been performed, the party rendering performance can withdraw from the contract and recover the performance or its value
Ratification
-In contract law, it is the act of accepting and giving legal force to an obligation that previously was not enforceable -A minor who has reached the age of majority can (blank) a contract expressly or impliedly -Express (blank) 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 contract -Implied (blank) takes place when the minor, on reaching the age of majority, indicates an intent to abide by the contract
Intoxication
-Intoxication is a condition in which a person's normal capacity to act or think is inhibited by alcohol or some other drug -A contract entered into by an intoxicated person can be either voidable or valid (and thus enforceable) -If the person was sufficiently intoxicated to lack mental capacity, then the agreement may be voidable even if the intoxication was purely voluntary -If, despite intoxication, the person understood the legal consequences of the agreement, the contract will be enforceable -Courts look at objective indications of the intoxicated person's condition to determine if he or she possessed or lacked the required capacity -It is difficult to prove that a person's judgement was so severely impaired that he or she could not comprehend the legal consequences of entering into a contract -Therefore, courts rarely permit contracts to be avoided due to intoxication
Minors
-Minors—or infants, as they are commonly referred to in legal terminology -usually are not legally bound by contracts -Today, in almost all states, the age of majority (when a person is no longer a minor) for contractual purposes is eighteen years -In addition, some states provide for the termination of minority on marriage -Minority status may also be terminated by a minor's emancipation, which occurs when a child's parent or legal guardian relinquishes the legal right to exercise control over the child -Normally, minors who leave home to support themselves are considered emancipated -Several jurisdictions permit minors themselves to petition a court for emancipation -For business purposes, a minor may petition a court to be treated as an adult -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) -A contract entered into by a minor, however, is voidable at the option of that minor, subject to certain exceptions -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
Often Violate Public Policy (exculpatory clauses)
-Most courts view exculpatory clauses with disfavor -Exculpatory clauses found in rental agreements for commercial property are frequently held to be contrary to public policy, and such clauses are almost always unenforceable in residential property leases -Courts also usually hold that exculpatory clauses are against public policy in the employment context -Thus, employers frequently cannot enforce exculpatory clauses in contracts with employees or independent contractors to avoid liability for work-related injuries
Contract Illegal through Fraud, Duress, or Undue Influence
-Often, one party to an illegal contract is more at fault than the other -When one party uses fraud, duress, or undue influence to induce another party to enter into an illegal bargain, the second party will be allowed to recover for the performance or its value
Enforcement Issues
-The laws governing the enforceability of covenants not to compete vary significantly from state to state -California prohibits the enforcement of covenants not to compete altogether -In some states, including Texas, such a covenant will not be enforced unless the employee has received some benefit in return for signing the noncompete agreement -This is true even if the covenant is reasonable as to time and area -If the employee receives no benefit, the covenant will be deemed void -Occasionally, depending on the jurisdiction, courts will reform covenants not to compete -If a covenant is found to be unreasonable in time or geographic area, the court may convert the terms into reasonable ones and then enforce the reformed covenant -Such court actions present a problem, though, in that the judge implicitly becomes a party to the contract -Consequently, courts usually resort to contract reformation only when necessary to prevent undue burdens or hardships
Disaffirmance
-The legal avoidance, or setting aside, of a contractual obligation -the general rule: contracts entered by minors are voidable at the option of the minor -To (blank), a minor must express his or her intent, through words or conduct, not to be bound to the contract -The minor must (blank) the entire contract, not merely a portion of it -Note that 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 (blank) the contract, the adult party normally is bound by it -On (blanking) 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
Members of Protected Classes
-When a statute is clearly designed to protect a certain class of people, a member of that class can enforce a contract in violation of the statute even though the other party cannot
When the Contract will be Valid (Mental Incompetence)
-a contract entered into by a mentally ill person (not previously declared incompetent) may be valid if the person had capacity at the time the contract was formed -Some people who are incompetent due to age or illness have lucid intervals—periods during which their intelligence, judgment, and will are temporarily restored -During such intervals, they will be considered to have legal capacity to enter into contracts
Covenants Not the Compete and the Same of an Ongoing Business
-a contracts in Restraint of Trade -Many contracts involve a type of restraint called a covenant not to compete, or a restrictive covenant (promise) -A covenant not to compete may be created when a merchant who sells a store agrees not to open a new store in a certain geographic area surrounding the old business -Such an agreement enables the seller to sell, and the purchaser to buy, the goodwill and reputation of an ongoing business without having to worry that the seller will open a competing business a block away -Provided the restrictive covenant is reasonable and is an ancillary part of the sale of an ongoing business, it is enforceable
Covenants Not to Compete in Employment Contracts
-a contracts in Restraint of Trade -Noncompete agreements are legal in most states so long as the specified period of time (of restraint) is not excessive in duration and the geographic restriction is reasonable -What constitutes a reasonable time period may be shorter in the online environment than in conventional employment contracts -Because the geographical restrictions apply worldwide, the time restrictions may be shorter -A restraint that is found to be overly broad will not be enforced
Effect of Illegality
-in general, an illegal contract is void—that is, the contract is deemed never to have existed, and the courts will not aid either party -In most illegal contracts, both parties are considered to be equally at fault—in pari delicto -If the contract is executory (not yet fulfilled), neither party can enforce it -If it has been executed, neither party can recover damages -Usually, the courts are not concerned if one wrongdoer in an illegal contract is unjustly enriched at the expense of the other -The main reason for this hands-off attitude is the belief that a plaintiff who has broken the law by entering into an illegal bargain should not be allowed to obtain help from the courts -Another justification is the hoped-for deterrent effect -A plaintiff who suffers a loss because of an illegal bargain will presumably be deterred from entering into similar illegal bargains in the future There are, however, exceptions to the general rule that neither party to an illegal bargain can sue for breach and neither party can recover for performance rendered: -justifiable ignorance of the facts -members of protected classes -withdrawal of protected classes -withdrawal from an illegal agreement -contract illegal through fraud, duress, or undue influence -severable, or divisible contracts
Legality
-the fourth requirement for a valid contract -For a contract to be valid and enforceable, it must be formed for a legal purpose -A contract to do something that is prohibited by federal or state statutory law is illegal and, as such, void from the outset and thus unenforceable includes: -contracts contrary to statute -contracts contrary to public policy
Contractural Capacity
-the legal ability to enter into a contractual relationship -the third requirement for a valid contract -Courts generally presume the existence of (blank), but in some situations, as when a person is very young or mentally incompetent, capacity may be lacking or questionable -Similarly, contracts calling for the performance of an illegal act are illegal and thus void—they are not contracts at all
