Chapter 12 Capacity and Legality - DONE
legality
Some contracts have BLANK objects. A contract with an BLANK object is void and therefore unenforceable. These contracts are called BLANK contracts. The following paragraphs discuss various illegal contracts.
Insane but Not Adjudged Insane
Some people have alternating periods of sanity and insanity. A person who has dealt with an insane person must place that insane person in status quo if the contract is either void or voided by the insane person. Most states hold that a party who did not know he or she was dealing with an insane person must be placed in status quo on voidance of the contract. Insane persons are liable in quasi contract to pay the reasonable value for the necessaries of life they receive.
Usury laws
State BLANK set an upper limit on the annual interest rate that can be charged on certain types of loans. The limits vary from state to state. Lenders who charge a higher rate than the state limit are guilty of usury. These laws are intended to protect unsophisticated borrowers from loan sharks and others who charge exorbitant rates of interest.
Regulatory licensing statute.
Statutes may require persons or businesses to obtain a license from the government to qualify to practice certain professions or engage in certain types of businesses. These statutes, which are enacted to protect the public, are called regulatory licensing statutes. Generally, unlicensed persons cannot recover payment for services where he or she does not have the required license.
Mentally Incompetent Persons MENTAL INCAPACITY
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. This state is called legal insanity. Most states use the objective cognitive "understanding" test to determine legal insanity. Under this test, the person's mental incapacity must render that person incapable of understanding or comprehending the nature of the transaction. Mere weakness of intellect, slight psychological or emotional problems, or delusions does not constitute legal insanity.
illegal contract illegal
A contract to perform an illegal act is called an BLANK. BLANK contracts are void. That is, they cannot be enforced by either party to the contract. The term BLANK is a misnomer, however, because no contract exists if the object of the contract is BLANK.
Disaffirm
A minor can expressly BLANK a contract orally, in writing, or through his or her conduct. No special formalities are required. The contract may be disaffirmed at any time prior to the person's reaching the age of majority plus a "reasonable time." The designation of a reasonable time is determined on a case-by-case basis.
INTOXICATION
A person who disaffirms a contract based on BLANK generally must be returned to the status quo. In turn, the BLANK 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 BLANK person can ratify the contracts he or she entered into while BLANK. BLANK persons are liable in quasi contract to pay the reasonable value for necessaries they receive.
Gambling Statutes
All states either prohibit or regulate gambling, wagering, lotteries, and games of chance via gambling statutes. States provide various criminal and civil penalties for illegal gambling. There are many exceptions to wagering laws. Many states 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.
Exculpatory clauses
An exculpatory clause (also called a release of liability clause) is a contractual provision that relieves one (or both) of the parties to a contract from tort liability. An exculpatory clause can relieve a party of liability for ordinary negligence. It cannot be used in a situation involving willful conduct, intentional torts, fraud, recklessness, or gross negligence. Exculpatory clauses are often found in leases, sales contracts, sporting event ticket stubs, parking lot tickets, service contracts, and the like. Such clauses do not have to be reciprocal (i.e., one party may be relieved of tort liability, whereas the other party is not).
period of minority
Any age below the statutory age of majority is called the BLANK .
Insane but Not Adjudged Insane
Any contracts made by such persons during a lucid interval are enforceable. Contracts made while the person was not legally sane can be disaffirmed.
Mentally Incompetent Persons MENTAL INCAPACITY
BLANKillness, brain damage, mental retardation, senility, and the like. The law protects people suffering from substantial mental incapacity from enforcement of contracts against them because such persons may not understand the consequences of their actions in entering into a contract.
pari delicto: The effetcs of illegality EXEMPT
At common law, parties to an illegal contract were considered in BLANK (in equal fault).
Contracts to commit crimes
BLANK acts 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.
The effetcs of illegality
Because illegal contracts are void, the parties cannot sue for nonperformance. Further, if an illegal contract is executed, the court will generally leave the parties where it finds them.
legality: Contracts Contrary to Law
Both federal and state legislatures have enacted statutes that prohibit certain types of conduct. Administrative agencies adopt rules and regulations to enforce statutory law. And the president of the United States can issue executive orders making certain conduct illegal. Contracts to perform activities that are prohibited by law are illegal contracts. These are called contracts contrary to law.
Contracts Contrary to Public Policy
Certain contracts are illegal because they are contrary to public policy. Contracts contrary to public policy are void. Although public policy eludes precise definition, the courts have held contracts to be contrary to public policy if they have a negative impact on society or interfere with the public's safety and welfare.
Do not have contractual capacity
Certain persons do not have this capacity, however, including minors, insane persons, and intoxicated persons. The common law of contracts and many state statutes protect persons who lack contractual capacity from having contracts enforced against them.
The effetcs of illegality
Certain situations are exempt from the general rule of the effect of finding an illegal contract. If an exception applies, the innocent party may use the court system to sue for damages or to recover consideration paid under the illegal contract. Persons who can assert an exception are as follows: 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.
Adjudged insane
Contract is void. Neither party can enforce the contract.
Insane but not adjudged insane
Contract is voidable by the insane person; the competent party cannot void the contract.
Special Business Contracts and Licensing Statutes
Describe covenants not to compete and exculpatory clauses and identify when they are lawful. The issue of the lawfulness of contracts applies to several special business contracts. These include contracts that restrain trade or provide services that require a government license, exculpatory clauses, and covenants not to compete. These contracts are discussed in the following paragraphs.
Duties of restoration and restitution:
Duties of restoration and restitution: COnditions: If a minor's contract is executory and neither party has performed, the minor can simply disaffirm the contract: There is nothing to recover because neither party has given the other party anything of value. If the parties have exchanged consideration and partially or fully performed the contract by the time the minor disaffirms the contract, however, the issue becomes one of what consideration or restitution must be made. The following rules apply:
Contracts Contrary to Public Policy
Example A contract that is based on sexual favors is an immoral contract and void as against public policy.
The effetcs of illegality EXEMPT : Innocent persons who were justifiably ignorant of the law or fact that made the contract illegal.
Example A person who purchases insurance from an unlicensed insurance company may recover insurance benefits from the unlicensed company.
The effetcs of illegality EXEMPT : Persons who were induced to enter into an illegal contract by fraud, duress, or undue influence.
Example A shop owner who pays $5,000 "protection money" to a mobster so that his store will not be burned down by the mobster can recover the $5,000.
Revenue-raising statute.
Example A state licensing statute requires licensed attorneys to pay an annual $500 renewal fee without requiring continuing education or other new qualifications. If a lawyer provides legal services but has not paid the annual licensing fee, the lawyer can still recover for her services.
Exculpatory clauses
Example If a department store had a sign above the entrance stating, "The store is not liable for the ordinary negligence of its employees," this would be an illegal exculpatory clause and would not be enforced.
The effetcs of illegality EXEMPT : Persons who entered into an illegal contract who withdraw before the illegal act is performed.
Example If the president of New Toy Corporation pays $10,000 to an employee of Old Toy Corporation to steal a trade secret from his employer but reconsiders and tells the employee not to do it before he has done it, the New Toy Corporation may recover the $10,000.
Special Business Contracts and Licensing Statutes
Example It would be an illegal restraint of trade for Toyota, General Motors, and Ford to agree to fix the prices of the automobiles they sell. Their contract would be void and could not be enforced by any of the parties against the other parties.
Exculpatory clauses
Example Jim voluntarily enrolls in a parachute jump course and signs a contract containing an exculpatory clause that relieves the parachute center of liability. After receiving proper instruction, he jumps from an airplane. Unfortunately, Jim is injured when he could not steer his parachute toward the target area. He sues the parachute center for damages. Here, the court would usually enforce the exculpatory clause, reasoning that parachute jumping was a voluntary choice and did not involve an essential service.
Regulatory licensing statute.
Example State law provides that legal services can be provided only by lawyers who have graduated from law school and passed the appropriate bar exam. Nevertheless, suppose Marie, a first-year law student, agrees to draft a will for Randy for a $350 fee. Because Marie is not licensed to provide legal services, she has violated a regulatory statute. She cannot enforce the contract and recover payment from Randy. Randy, even though receiving services by having his will drafted, does not have to pay Marie $350.
Unconscionable contracts
Example Suppose a door-to-door salesperson sells a poor family a freezer full of meat and other foods for $3,000, with monthly payments for 60 months at 20 percent interest. If the actual cost of the freezer and the food is $1,000, this contract could be found to be unconscionable. The court could either find the entire contract unenforceable or rewrite the contract so that it has reasonable terms.
Usury laws
Example Suppose a state has set a usurious rate of interest as any interest rate above 15 percent. Christopher borrows $1,000 from Tony, which requires Christopher to pay $4,000 in one year to pay off the loan. This is a usurious loan because that amount of interest—$3,000—calculates to a 300 percent annual interest rate.
Duties of restoration and restitution: Minor's duty of restoration.
Example When Sherry is 17 years old (a minor), she enters into a contract to purchase an automobile costing $10,000 from Bruce, a competent adult. Bruce, who believes that Sherry is an adult and does not ask for verification of her age, delivers ownership of the automobile to Sherry after he receives her payment of $10,000. Subsequently, before Sherry reaches the age of 18 (the age of majority), she is involved in an automobile accident caused by her own negligence. The automobile sustains $7,000 worth of damage in the accident (the automobile is now only worth $3,000). Sherry can disaffirm the contract, return the damaged automobile to Bruce, and recover $10,000 from Bruce. In this result, Sherry recovers her entire $10,000 purchase price from Bruce, and Bruce has a damaged automobile worth only $3,000.
legality: Contracts Contrary to Law
Examples An agreement between two companies to engage in price fixing in violation of federal antitrust statutes is illegal and therefore void. Thus, neither company to this illegal contract can enforce the contract against the other company. In the following case, the court addressed the legality of contracts.
Necessaries of Life:
Examples Goods and services such as automobiles, tools of trade, education, and vocational training have also been found to be necessaries of life in some situations.
Duties of restoration and restitution: Competent party's duty of restitution.
Examples If in the prior example Sherry had recklessly caused the accident (e.g., by driving 20 miles an hour over the speed limit) or had misrepresented her age when she purchased the car, Sherry can still disaffirm the contract and return the damaged automobile to Bruce, but she can recover only $3,000 from Bruce. In this result, Bruce is made whole (he keeps $7,000 of Sherry's money and has a damaged automobile worth $3,000). Sherry has $3,000.
Necessaries of Life:
Examples Items such as food, clothing, shelter, and medical services are generally understood to be .
Duties of restoration and restitution: Minor's duty of restoration.
Generally, a minor is obligated only to return the goods orproperty he or she has received from the adult in the condition it is in at the time of disaffirmance (subject to several exceptions, discussed later in this chapter), even if the item has been consumed, lost, or destroyed or has depreciated in value by the time of disaffirmance. This rule, called the duty of restoration, is based on the rationale that if a minor had to place the adult in status quo on disaffirmance of a contract, there would be no incentive for an adult not to deal with a minor.
Ratified
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 BLANK(accepted). Hence, the minor (who is now an adult) is bound by the contract; the right to disaffirm the contract is lost. Note that any attempt by a minor to ratify a contract while still a minor can be disaffirmed just as the original contract can be disaffirmed.
Duties of restoration and restitution: Competent party's duty of restitution.
If a minor has transferred consideration—money, property, or other valuables—to a competent party before disaffirming the contract, that party must place the minor in status quo. That is, the minor must berestored to the same position he or she was in before the minor entered into the contract. This restoration is usually done by returning the consideration to the minor. If the consideration has been sold or has depreciated in value, the competent party must pay the minor the cash equivalent. This action is called the duty of restitution.
Insane but Not Adjudged Insane
If no formal ruling has been made about a person's sanity but the person suffers from a mental impairment that makes him or her legally insane—that is, the person is insane but not adjudged insane—any contract entered into by this person is voidable by the insane person. Unless the other party does not have contractual capacity, he or she does not have the option to void the contract.
Infancy doctrine
If performance of the contract favors the minor, the minor will probably enforce the contract. Otherwise, he or she will probably disaffirm the contract. A minor may not affirm one part of a contract and disaffirm another part.
Gambling Statutes: Indian Gaming Regulatory Act (IGRA)
In 1988, Congress enacted the BLANK which established the framework for permitting and regulating Native American gaming casinos. There are more than 450 such establishments in the country operated by more than 240 federally recognized tribes. Federal law permits these casinos only if the state permits such gambling.
Unconscionable contracts
In addition, courts hold that Blank are unenforceable. An unconscionable contract is one that is so oppressive or manifestly unfair that it would be unjust to enforce it.
Mentally Incompetent Persons
In most contracts, the parties to the contract are mentally competent to enter into the contract. However, in certain other cases, a party to a contract may not have had the requisite mental competence to have entered into an enforceable contract. In those situations, a BLANK will not be bound to the contract.
The effetcs of illegality EXEMPT
Innocent persons who were justifiably ignorant of the law or fact that made the contract illegal.
Revenue-raising statute.
Licensing statutes enacted to raise money for the government are called revenue-raising statutes. 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. Otherwise, many adults would refuse to sell these items to them. There is no standard definition of what is a necessary of life. The minor's age, lifestyle, and status in life influence what is considered necessary.
Necessaries of Life:
Minors have to pay for actions that are the necessities of life.
Age of majority
Most states have enacted statutes that specify BLANK.
Age of majority
Most states have enacted statutes that specify the BLANK The most prevalent BLANK is 18 years of age for both males and females
Usury laws
Most states provide criminal and civil penalties for making usurious loans. Some states require lenders to remit the difference between the interest rate charged on the loan and the usury rate to the borrower. Other states prohibit lenders from collecting any interest on the loan. Still other states provide that a usurious loan is a void contract, permitting the borrower not to have to pay the interest or the principal of the loan to the lender.
intoxication
Most states provide that contracts entered into by certain BLANK persons are voidable by those persons. The BLANK may occur because of alcohol or drugs. The contract is not voidable by the other party if that party had contractual capacity.
Duties of restoration and restitution: Competent party's duty of restitution.
Most states provide that the minor owes a duty of restitution and must put the adult in status quo on disaffirmance of the contract if the minor's intentional, reckless, or grossly negligent conduct caused the loss of value to the adult's property. On occasion, minors might misrepresent their age to adults when entering into contracts. Most state laws provide that minors who misrepresent their age must place the adult in status quo if they disaffirm the contract.
Usury Laws
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.
legality: A lawful contract
One requirement to have an enforceable contract is that the object of the contract must be lawful. Most contracts that individuals and businesses enter into are lawful contracts that are enforceable. These include contracts for the sale of goods, services, real property, and intangible rights; the lease of goods; property leases; licenses; and other contracts.
Parents liability for children's contracts:
Parents liability for childrens contracts: Generally, parents owe a legal duty to provide food, clothing, shelter, and other necessaries of life for their minor children. Parents are liable for their children's contracts for necessaries of life if they have not adequately provided such items.
The effetcs of illegality EXEMPT
Persons who entered into an illegal contract who withdraw before the illegal act is performed.
The effetcs of illegality EXEMPT
Persons who were induced to enter into an illegal contract by fraud, duress, or undue influence.
The effetcs of illegality EXEMPT
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.
Ratification
The BLANK, which relates back to the inception of the contract, can be expressed by 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).
INTOXICATION
The amount of alcohol or drugs that must be consumed for a person to be considered legally intoxicated to disaffirm contracts varies from case to case. The factors that are considered include the user's physical characteristics and his or her ability to "hold" intoxicants.
Special Business Contracts and Licensing Statutes: Contract in Restraint of Trade
The general economic policy of this country favors competition. At common law, contracts in restraint of trade—that is, contracts that unreasonably restrain trade—are held to be unlawful.
Parents liability for children's contracts: Emancipation
The parental duty of support terminates if a minor becomes BLANK. BLANK 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.
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.
Necessaries of Life:
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. The following feature discusses modern statutes that make minors liable on certain contracts.
Infancy Doctrine:
To protect minors, the law recognizes the BLANK, which gives minors the right todisaffirm (or cancel) most contracts they have entered into with adults. This right is based on public policy, which reasons that minors should be protected from the unscrupulous behavior of adults. In most states, the infancy doctrine is an BLANK. If a person's age is below the age of majority, the court will not inquire into his or her knowledge, experience, or sophistication. Generally, contracts for the necessaries of life, which we discuss later in this chapter, are exempt from the scope of this doctrine.
Infancy doctrine
Under the BLANK, a minor has the option of choosing whether to enforce a contract (i.e., the contract 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.
intoxication
Under the majority rule, the contract is voidable only if the person was so intoxicated when the contract was entered into that he or she was incapable of understanding or comprehending the nature of the transaction. In most states, this rule holds even if the BLANK was self-induced. Some states allow the person to disaffirm the contract only if the person was forced to become intoxicated or did so unknowingly.
Unconscionable contracts
are sometimes found where there is a consumer contract that takes advantage of uneducated, poor, or elderly people who have been persuaded to enter into an unfair contract.
Minors
do not always have the maturity, experience, or sophistication needed to enter into contracts with adults. .
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. The courts will consider such factors as the type of activity involved; the relative bargaining power, knowledge, experience, and sophistication of the parties; and other relevant factors.
Immoral contracts
that is, 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.
All states have licensing statutes: Licensing Statutes
that require members of certain professions and occupations to be licensed by the state in which they practice. Lawyers, doctors, real estate agents, insurance agents, certified public accountants, teachers, contractors, hairdressers, and such are among them. In most instances, a license is granted to a person who demonstrates that he or she has the proper schooling, experience, and moral character required by the relevant statute. Sometimes, a written examination is also required. 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 statute: Regulatory and Revenue Raising Statutes