Ch. 12 - Capacity and Legality

unconscionable contract--T

-a contract that courts refuse to enforce in part or at all because it is so oppressive or manifestly unfair as to be unjust -based on public policy -there is no single definition of unconscionability -this doctrine may not be used merely to save a contracting party from a bad margin ----------------------------------- UNCONSCIONABLE CONTRACTS OR CLAUSES: o Courts generally don't inquire into adequacy of consideration. o Persons are presumed to be reasonably intelligent o courts will not come to their aid just because they have made dumb contracts. BUT, IN CERTAIN CIRCUMSTANCES bargains are so oppressive and "unconscionable" because they are "unscrupulous" or grossly unfair as to be "void of conscience". K's that "SHOCK THE CONSCIENCE" o Elements: • Parties possessed severely unequal bargaining power; • Dominant party unreasonably used its unequal power to obtain oppressive or manifestly unfair terms. • The "adhereing" party had no reasonable alternative. o *****[t]Procedural unconscionability: The Issue is the way in which that "bad" term actually became part of the contract.***** • What are some examples? [Inconspicuous print, unintelligible language, lack of opportunity to read, disparity in bargaining power, etc.] o Adhesion contracts can sometimes be deemed unconscionable. • Def: K is written exclusively by one party (usually a form) and it's a take-it-or leave it deal. Smaller party has little or no opp to negotiate and no other choice. • E.g., utilities. • Substantive unconscionability: Oppressive or overly harsh. o Courts look at provisions that deprive one party of benefits and leave another party without remedy for nonperformance. o E.g.: Person w/ no education buys a $900 fridge for $4000, on 2-year K. • Some courts say it's unconscionable cuz terms are so oppressive or bad that they "Shock the conscience." • Query: How bad does it have to be to shock the conscience? • E.g.: One party has to arbitrate. Is that unconscionable?

contract contrary to public policy

-a contract that has a negative impact on society or that interferes with the public's safety and welfare

contract in restraint of trade

-a contract that unreasonably restrains trade ------------------------------

-covenant not to compete

-a contract which provides that a seller of a business or an employe will not engage in similar business or occupation within a specified geographical area for a specified time following the sale of the business or termination of employment -aka noncompete clause -covenants not to compete that are ancillary to a legitimate sale of a business or employment contract are lawful if they are reasonable in three aspects: (1)the line of business protected (2) the geographic area protected (3) the duration of the restriction -unreasonable = not enforceable----either will not enforce or will change so that it is reasonable

insane but not adjudged insane

-being insane but not having been adjudged insane by a court or an administrative agency -a contract entered into by such person is generally voidable -some states hold that such a contract is void -some people have alternating periods of sanity and insanity---any contracts made by such persons during a lucid interval are enforceable -insane persons are liable in quasi-contract to pay the reasonable value for the necessaries of life they receive

special business contracts

-contract in restraint of trade -licensing statute -exculpatory clause -covenant not to compete

-exculpatory clause

-a contractual provision that relieves one (or both) of the parties to a contract from tort liability for ordinary negligence -aka a release of liability clause -exculpatory clauses that either affect the public interest or result from superior bargaining power are usually found to be void as against public policy -although the outcome varies with the circumstances of the case, the greater the degree to which the party serves the general public, the greater the chance that the exculpatory clause will be struck down as illegal -------------------------------------- Def: Release a party from liability, no matter who is at fault. o They are usually effective to release liability for ordinary negligence. o They usually DON'T work for willful, gross negligence, fraud, etc. o If they are in residential lease agreements, they are almost always contrary to public policy and disallowed. • Some are allowed for non-essential services: health clubs, racetracks, skiing facilities, etc). o Providers don't have relative advantage and bargaining strength. They don't have customers "over a barrel" like cell phones or utilities.

infancy doctrine

-a doctrine that allows minors to disaffirm(cancel) most contracts they have entered into with adults -a minor has the option of choosing whether to enforce a contract----its is voidable by a minor -the adult party is bound to the minor's decision -if both parties to a contract are minors, both parties have the right to disaffirm the contract -minor may not affirm one part of the contract and disaffirm another part

effect of illegality - TEST

-a doctrine which states that the courts will refuse to enforce or rescind an illegal contract and will leave the parties where it finds them ---------------------------------- people who can assert an exception are: -innocent persons who were justifiably ignorant of the law or fact that made the contract illegal -persons who were induced to enter into an illegal contract by fraud, duress, or undue influence -persons who entered into an illegal contract who withdraw before the illegal act is performed -persons who were less at fault than the other party for entering into the illegal contract. At common law, parties to an illegal contract were considered in pari delicto(in equal fault). Some states have changed this rule and permit the less-at-fault party to recover restitution of the consideration they paid under an illegal contract from the more-at-fault party --------------------------------------- ******[T] EFFECT OF ILLEGALITY: • Generally, illegal contracts are void ab initio. As if never formed. • In most illegal contracts, parties are deemed in pari delecto (equally at fault). o E.g., contract to buy stolen goods. The seller can't enforce, even if buyer has been enriched. •****** [T] Exception to the general rule: Sometimes one party to an illegal bargain can sue for breach. o Justifiable ignorance of the facts: When one party is innocent and doesn't know the facts, he can recover benefits conferred. • ******[T] E.g., Trucker contracts to ship goods for $5k. He doesn't know they are illegal. When he ships them, can he enforce the deal? • Yes. Even though the shipping was illegal, trucker is innocent and can collect on K price. • Practical issues: Cost-benefit of suing over small amounts. o Members of a protected class: E.G., Law says Flight attendants can't fly more than a certain number of hours per month. • But if they work more, even though it violates statute, they are still entitled to overtime. o Withdrawal from an illegal agreement: If the illegal portion has not yet been performed, the party rendering performance can withdraw from the K and recover the value of what he has done so far. • E.g., Parties wager illegally on a dog fight. They both deposit $ w/ "stakeholder" (escrow). • Each party has performed. But the "illegal" part doesn't happen until payout to winning better. • Before that payment, either party can w/draw by giving notice to stakeholder. • Practical: You can Welch legally, but if you run with this crowd, you won't get away with it... o Contract illegal through fraud, duress, or undue influence: • If party is induced to enter illegal k by fraud, undue duress, or undue influence, the "defrauded" party will be allowed to recover for the performance or its value.

usury laws

-a law that sets an upper limit on the interest rate that can be charged on certain types of loans -lenders who charge a higher rate than the state limit are guilty of usury -intended to protect unsophisticated borrowers from loan sharks and others who charge exorbitant rates of interest -most usury laws exempt certain types of lenders and loan transactions involving legitimate business transactions from the reach of the law....these exemptions usually include loans made by banks and other financial institutions, loans above a certain dollar amount, and loans made to corporations and other businesses

intoxicated persons---TEST BOLDED

-a person who is under contractual incapacity because of ingestion of alcohol or drugs to the point of incompetence -contracts are voidable -the contract is not voidable by the other party if that party had contractual capacity -factors that are considered include the user's physical characteristics and his or her ability to "hold" intoxicants -a person who disaffirms a contract based on intoxication generally must be returned to the status quo. In turn, the intoxicated person generally must return the consideration received under the contract to the other party and make restitution that returns the other party to status quo. After becoming sober, an intoxicated person can ratify the contracts he or she entered into while intoxicated. Intoxicated persons are liable in quasi-contract to pay the reasonable value for necessaries they receive -------------------------------- . INTOXICATION • A contract entered into by intoxicated people can be either voidable or valid. • [T] If person was sufficiently intoxicated to lack mental capacity, the contract may be voidable by the drunk EVEN IF THE INTOXICATION WAS PURELY VOLUNTARY. • To be voidable, defendant must prove: o intoxication impaired his reason and judgment so severely he didn't comprehend the legal consequences. • If despite being smashed, he understood consequences, K is enforceable. o (Fact that it is foolish or unfavorable doesn't make it voidable.) • As a Practical matter, most courts rarely permit avoidance based on intox. o Why? [Hard to prove whether they were sufficiently intoxicated to lack capacity. o Instead of relying on drunk's testimony, Most courts look at objective indications whether K exists. • 1. Disaffirmance. Drunk can disaffirm while intoxicated and for reasonable time after becoming sober. (Also practical problems...?) • To avoid K, drunk must return all consideration (except for K's involving necessaries. ) o Those are voidable, but drunk is liable in quasi-K for reasonable value (just like w/ minors). 2. Ratification: Drunk may ratify expressly or impliedly. a. Implied ratification: Fails to disaffirm the contract within a reasonable time after becoming sober. i. (e.g., Barroom deal; next day, drunk fails to disaffirm the k. What result? 1. What about after a week? o What if he continues to use the property? [Acts or conduct inconsistent with intent to disaffirm may be ratification]

Minor's duty of restoration

-a rule which states that a minor is obligated only to return the goods or property he or she has received from the adult in the condition it is in at the time of disaffirmance -based on the rationale that if a minor had to place the adult in status quo upon disaffirmance of a contract, there would be no incentive for an adult not to deal with a minor --------------------------------- competent party's duty of restitution -a rule which states that if a minor has transferred money, property, or other valuables to the competent party before disaffirming the contract, that party must place the minor in status quo -that is, the minor must be restored to the same position he or she was in before the minor entered into the contract -if the consideration has been sold or has depreciated in value, the competent party must pay the minor the cash equivalent WHAT DOES STATUS QUO MEAN

-licensing statute

-a statute that requires a person or business to obtain a license from the government prior to engaging in a specified occupation or activity -problems arise if an unlicensed person tries to collect payment for services provided to another under a contract -some statutes expressly provide that unlicensed persons cannot enforce contracts to provide these services -if the statute is silent on the point, enforcement depends on whether it is a regulatory statute or a revenue-raising statue

contracts to commit crimes

-are void -if the object of a contract becomes illegal after the contract is entered into because the government has enacted a statute that makes it unlawful, the parties are discharged from the contract -the contract is not an illegal contract unless the parties agree to go forward and complete it

immoral contract

-contracts whose objective is the commission of an act that society considers immoral---may be found to be against public policy -judges are not free to define morality based on their individual views---instead, they must look to the practices and beliefs of society when defining immoral conduct

adjudged insane

-declared legally insane by a proper court or administrative agency -a contract entered into by a person adjudged insane is void -if adjudged insane, the court will make that person a ward of the court and appoint a guardian to act on that person's behalf -the court-appointed guardian is the only one who has the legal authority to enter into contracts on behalf of the person

minors

-do not always have the maturity, experience, or sophistication needed to enter into contracts with adults -females under the age of 18 and males under the age of 21 -age of majority----18 for both males and females -any age below the statutory age of majority is called the period of minority

contracts contrary to statutes

-federal and state legislatures have enacted statutes that prohibit certain types of conduct -contracts to perform activities that are prohibited by statute are illegal contracts -EX - agreement between 2 companies to engage in price fixing in violation of federal antitrust statutes is illegal and therefore void---neither company to this illegal contract can enforce the contract against the other company ------------------------------------------ • Anti-Competition Agreements -- usually adverse to public policy and violate one of more federal statutes. o E.g. - price-fixing agreements (like big oil producers agreeing to reduce price by a penny to wipe out smaller companies) o anti-trust, monopolies. FCC has to approve certain mergers of communication companies. o Exceptions: If restraint is reasonable. • E.g., MLB • Covenants not to compete - Sale of Ongoing Business: • If ancillary to sale of business or employment contract: o Must be a reasonable period of time, and reasonable geographic restriction. • It must also protect legitimate business interest. • Enforcement problems w/ cov's not to compete: o Some states not enforced unless there is separate consideration. California prohibits enforcement altogether. o If covenant is unreasonable, some courts convert it to a reasonable term. o Utah and other courts throw it out if not reasonable. Won't re-write it. •

ratification

-if a minor does not disaffirm a contract either during the period of minority or within a reasonable time after reaching the age of majority, the contract is considered ratified(accepted)---loses right to disaffirm the act of a minor after the minor has reached the age of majority by which he or she accepts a contract entered into when he or she was a minor -has to disaffirm either during the period of minority or within a reasonable time after reaching the age of majority -ratification can be by express oral or written words or implied from the minor's conduct(e.g.after reaching the age of majority, the minor remains silent regarding the contract)

mentally incompetent persons

-legal insanity -adjudged insane -insane but not adjudged insane ---------------------------------------- • When is K Void? [contract is void ab initio if there was Previous determination of mental incapacity before entering K. o [book calls it "adjudged insane"; that's a little archaic. It's "incompetent" now] • When Voidable?: Person Not Previously adjudged to be incompetent, but it is later determined that person was incompetent at the time. o K is voidable if person didn't know they were entering K or lacked the mental capacity to comprehend its nature, purpose and consequences. o E.g., Grandma and CU Auto. Then v. Now. o Only the mentally incompetent person has the option to avoid the contract. (or their guardian, estate, etc) o Contract may be disaffirmed or ratified. • If disaffirmed, person must return the items and pay for reasonable value of necessaries. • When the contract is valid: K entered into by mentally incompetent person (not previously adjudged incompetent), may also be valid if person had capacity at the time of contracting. o Person can understand nature and effect of K, but still lack capacity for other activities... o What if incomp. Person has "lucid interval" where they know what's going on. What if they enter K during that time? • During that time → they are considered to have full capacity.

regulatory statute

-licensing statutes enacted to protect the public -generally unlicensed persons cannot recover payment for services that a regulatory statute requires a licensed person to provide

revenue-raising statue

-licensing statutes enacted to raise money for the government -a person who provides services pursuant to a contract without the appropriate license required by such a statute can enforce the contract and recover payment for services rendered

necessaries of life

-minors are obligated to pay for the necessaries of life that they contract for -food, clothing, shelter, medical care, and other items considered necessary to the maintenance of life -no standard definition of what is a necessary of life---minor's age, lifestyle, and status in life influence what is considered necessary.

contractual capacity

-parties to a contract need to have contractual capacity to enter into the contract -certain people do not have this capacity---minors, insane persons, intoxicated persons -unconscionable contracts---are unenforceable---one that is so oppressive or manifestly unfair that it would be unjust to enforce it

gambling statutes

-statutes that make certain forms of gambling illegal -many state have enacted statutes that permit games of chance under a certain dollar amount, bingo games, lotteries conducted by religious and charitable organizations, and the like -many states also permit and regulate horse racing, harness racing, dog racing, and state-operated lotteries

disaffirmance----what is the majority rule?

-the act of a minor to rescind a contract under the infancy doctrine -disaffirmance may be done orally, in writing, or by the minor's conduct ----------------------------- 3. Minor's obligations if he disaffirms. [T] a. What does the minor have to do? • Majority rule: Minor need only return the goods in condition they are in at time of disaffirmance. o [T] even if consumed, lost, destroyed, or depreciated o If minor returns them, he's done! That fulfills his duty. o Competent party's duty: restitution • Minor is entitled to refund of the purchase price. • Competent party has to put the minor back to status quo • E.,g.: Bob (17) buys a computer from RC Willey, on credit. • He's careless and drops it on the way home. Breaks the casing. • Takes it back. o What result? [Bob entitled to rescission (cancellation) of credit agreement.] • (i.e., no further obligation) • [T] Exception: If depreciation or loss is caused by minor's intentional, reckless, or grossly negligent conduct, then minor must restore the other party to status quo.

contracts of adhesion

-they are preprinted forms whose terms the consumer cannot negotiate and which they must sign in order to obtain a product or service -most adhesion contracts are lawful even though there is a disparity in power of contracting ------------------------ o Adhesion contracts can sometimes be deemed unconscionable. • Def: K is written exclusively by one party (usually a form) and it's a take-it-or leave it deal. Smaller party has little or no opp to negotiate and no other choice. • E.g., utilities.

Minor's obligation if he disaffirms----TEST-BOLDEDx

3. Minor's obligations if he disaffirms. [T] a. What does the minor have to do? • Majority rule: Minor need only return the goods in condition they are in at time of disaffirmance. o [T] even if consumed, lost, destroyed, or depreciated o If minor returns them, he's done! That fulfills his duty. o Competent party's duty: *****restitution***** • Minor is entitled to refund of the purchase price. • Competent party has to put the minor back to status quo • E.,g.: Bob (17) buys a computer from RC Willey, on credit. • He's careless and drops it on the way home. Breaks the casing. • Takes it back. o What result? [Bob entitled to rescission (cancellation) of credit agreement.] ----- • [T] Exception: If depreciation or loss is caused by minor's intentional, reckless, or grossly negligent conduct, then minor must restore the other party to status quo.

3. [T] EXCULPATORY CLAUSES:

Def: Release a party from liability, no matter who is at fault. o They are usually effective to release liability for ordinary negligence. o They usually DON'T work for willful, gross negligence, fraud, etc. o If they are in residential lease agreements, they are almost always contrary to public policy and disallowed. • Some are allowed for non-essential services: health clubs, racetracks, skiing facilities, etc). o Providers don't have relative advantage and bargaining strength. They don't have customers "over a barrel" like cell phones or utilities. -Jim Jackson voluntarily enrolled in a parachute jump course and signed a contract containing an exculpatory clause that relieved the parachute center of liability--injured...tried to sue...court would usually enforce the exculpatory clause, reasoning that parachute jumping was a voluntary choice and did not involve an essential service

in pari delicto

a situation in which both parties are equally at fault in an illegal contract

legal insanity

a state of contractual incapacity, as determined by law -to be relieved of his or her duties under a contract, a person must have been legally insane at the time of entering into the contract -most states use the objective cognitive understanding test to determine legal insanity -mere weakness of intellect, slight psychological or emotional problems, or delusions does not constitute legal insanity

4. Exceptions to Minor's right to disaffirm [Test]----BOLD

a. What if the minor misreps his age? o Majority rule: minor can disaffirm K, even if he lies about age, but has to put other party to status quo ante. b. [T] Contracts for "necessaries": minor who enters K for "necessaries" may disaffirm the contract BUT REMAINS LIABLE FOR REASONABLE VALUE OF THE GOODS. o What are Necessaries???: items that fill basic needs (food, clothing, shelter, medical services, etc)—*****at level of value required to maintain minor's "standard of living or financial or social status."***** • Keep in mind: "Necessary" for one child might be "luxury" for another. • E.g., low-income minor buys expensive jeans. Necessaries? [prob'ly not, so not liable for value] o What about rich kid and that's all she wears? [prob'ly. Can be held liable] • Whether something is a necessary depends on whether minor is under care or control of his parents. • Parents are required by law to provide those necessaries to the minor. o So, if parents provide shelter, is apartment lease a "necessary"???. [Arguably not.] • o To sum up: To qualify as contract for necessaries: • (1) item must be necessary for minor's subsistence; • (2) value must be up to level required to maintain minor's standard of living and social status; and • (3) minor must not be under care of parent or guardian who is required to supply this item. o Unless these criteria are met, minor can disaffirm contract without being liable for reasonable value of goods.

legality

lawful contracts - enforceable---contracts for the sale of goods, services, real property, and intangible rights; the lease of goods; property leases; licenses; and other contracts -some contracts have illegal objects---these are void and therefore unenforceable

Parente v. Pirozzoli

o Usury. If K is in violation of usury laws, some states discharge the excess interest above and beyond legal maximum. • Some states award principal, but no interest. o Gambling (in states where it is illegal): • Traditionally statues deem gambling contracts illegal and void. • What about Online gambling?. [Most courts: gambling takes place in the state of the gambler.] o Sabbath laws. Some states: contracts entered into on Sunday are illegal. Many states, K can be ratified on the weekday. o [T] Licensing statutes. Many professions and occupations are required to be licensed. • K with an unlicensed individual may still be enforceable depending on the nature of the statute. • If purpose is to protect public from unauthorized practitioners... o K w/ unlicensed individual is usually ILEGAL VOID AND UNENFORCEABLE. • If purpose is to raise government revenues... o K is gen'ly is enforceable.

elements of unconscionability

the following elements must be shown to prove that a contract or a clause in a contract is unconscionable: -the parties possessed severely unequal bargaining power -the dominant party unreasonably used its unequal bargaining power to obtain oppressive or manifestly unfair contract terms -the adhering party had no reasonable alternative ---------------------------------- if the court finds that a contract or contract clause in unconscionable, it may (1) refuse to enforce the contract (2) refuse to enforce the unconscionable clause but enforce the remainder of the contract or (3) limit the applicability of any unconscionable clause so as to avoid any unconscionable result -because unconscionability is a matter of law, the judge may opt to decide the case without a jury trial

emancipation

the parental duty of support(food, clothing, shelter) terminates if a minor becomes emancipated -emancipation occurs when a minor voluntarily leaves home and lives apart from his or her parents -the courts consider factors such as getting married, setting up a separate household, or joining the military in determining whether a minor is emancipated -each situation is examined on its merits ----------------------- • Minors are personally liable for their own torts. • In some states, parents liable for negligence in failing to exercise proper parental control over child. o E.g.: People who let underage drivers take car.

quasi contract

the seller's recovery is based on the equitable doctrine of quasi-contract rather than on the contract itself -under this theory, the minor is obligated only to pay the reasonable value of the goods or services received -reasonable value is determined on a case-by-case basis