Chapter 14- Capacity and Legality
contractual capacity
- party may have the capacity to enter into a valid contract but also has the right to avoid liability under it - minors, or infants, usually are not legally bounded by contracts
often violate public policy
- most courts view exculpatory clauses with disfavor
if contract is executory
- neither party can enforce it
covenants not to compete in employment contracts
- noncompete agreements are sometimes included in employment contracts - people in middle and upper level management commonly agree not to work for competitors/ not to start competing for a specified period of time after termination
substantive unconscionability
- occurs when contracts, portions of contracts, are oppressive or overly harsh - generally focus on provisions that deprive one party of the benefits of the agreement or leave that party without a remedy for nonperformance by the other
2. plaintiff claimed that the release was ambiguous because didn't set forth individuals it pertained to, but court found that it did
- "any" = all inclusive= not ambiguous, so don't need to state specific names
LEGALITY
- 4th requirement for valid contract - contract must be formed for a legal purpose - a contract to commit tortuous act and to do something that is prohibited by federal/state statutory law is contrary to the public policy and therefore illegal and unenforceable
misrepresentation of age
- In some states misrepresentation of age is enough to prevent disaffirmance - especially when engaged in business
CASE: Sturdza v. united Arab Emirates Background and facts
- UAE held competition for design of new embassy in WA - at the end of competition, UAE informed Elena Sturdza ( the architect licensed in maryland and texas but not in district of columbia) that she had won. - Sturdza and UAE began to negotiate a contract - exchanged proposals for 2 years -UAE stopped communicating to her without an explanation , no contract was ever signed - UAE contracted with different architect - Sturdza filed suit against UAE for breach of contract, claiming that the other architects design copied many features that were hallmarks of hers - District court issued summary judgement in the UAE's favor and Sturdza appealed
adhesion contract
- a contract written exclusively by one party and presented to the other on a take it or leave it basis
divisible into legal and illegal portions
- a court may enforce the legal portion but not the illegal one so long as the illegal portion doesn't 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 ex) contracts to compete,,,, alter the time frame and extent of no competition instead of throwing the whole covenant away
Usury
- a lender who makes a loan at an interest rate above the lawful maximum commits this - usury statutes place ceiling on allowable rates of interest, but states can make exceptions to facilitate bus transactions
to disaffirm
- a minor must express his or her intent through words/conduct, not to be bound to the contract - the minor must disaffirm the entire contract, not merely a portion of it.
intoxication
- a persons normal capacity to act/ think is inhibited by alcohol or some other drug - contract entered into by intoxicated person = can be voidable or valid (thus enforceable) - if person was sufficiently intoxicated as a lack of mental capacity, then the agreement can be voidable
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 -
contract illegal through fraud, duress, or undue influence
- 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
contracts in restraint of trade
- anticompetitive agreements, usually adversely affect public policy that favors competition in the economy - such trusts also violate one or more federal or state antitrust statutes - exception recognized when the restraint is reasonable and contained in a secondary or subordinate clause in a contract
CASE: Comedy club v. Improv west associates In the language of the court:
- arbitrators reward is completely irrational because theres no basis in the record for their decision - covenant not to compete has dramatic geographical and time related scope - arbitrators award forecloses comp in a substantial share of the comedy club business - economic restraint is too broad to be tolerated, the covenant not to compete must be tailored to relate to the areas in which cci is operating improv clubs under license agreement - in favor of improv west with regard to counties where cci is operating, weigh cci's right to operate bus against improv wests interest to protect and maintain its trademark, name and goodwill -said that district ct. should set aside award but uphold covenant in those counties where cci currently operates improv clubs - can open in counties where doesn't have
in pari delicto
- both parties are considered to be equally at fault in illegal contracts
To exercise the option to avoid a contract, a minor need
- clearly show an intention not to be bound by it - the minor "avoids" the contract by disaffirming it
indivisible contract
- complete performance by each party is essential even if the contract contains a number of seemingly separate provisions
severable, or divisible, contracts
- consists of distinct parts that can be performed separately with separate consideration provided for each part
must be within a reasonable time
- contract can ordinarily be disaffirmed at any time during minority or for a reasonable period after reaching majority
contracts to commit crime
- contract to sell illegal drugs in violation of criminal law is unenforceable, as is a contract to cover up a corportations violation of the Dodd frank wall street reform and consumer protection act - sometimes object/performance of contract is rendered illegal by a statute after the parties entered into the contract.. the contract is considered to be discharged by the law
illegal contracts
- contracts calling for an illegal act
Discriminatory Contracts
- 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 statue and public policy - and are unenforceable
mental incompetence
- contracts made by mentally incompetent persons can be void, voidable, or valid
3. plaintiffs also claimed that "any" doesn't apply bc cou4rts require more specificity in a prospective release
- court disagrees, public policy disfavors but does not prohibit releases of future negligence - to be enforceable in Missouri, exculpatory clauses must contain clear, unambiguous, unmistakenable, and conspicuous language in order to release a party from his/her own negligence - exculpatory language must effectively notify a party that he/she is releasing the other party from claims arising from the other partys own negligence
covenants not to compete and sale of an ongoing business
- covenant not to compete created when a seller of a store agrees not to open a new store in a certain geographic area surrounding the old business - it is enforceable
gambling
- 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 to receive the property - all states have statutes that regulate gambling, but some allow certain forms such as horse races
parent's liability
- parents are not liable for contracts made by minor children acting on their own -businesses require parents to cosign any contract made with a minor
Sturdza v. UAE decision and remedy
- district of Columbia court of appeals held that an architect cannot recover on a contract to perform architectural services in the district of Columbia if he/she lacks a district of Columbia license. there is no exception for international design competitions
Case: Comedy club v. CII decision and remedy
- federal appellate ct. reversed part of lower courts confirmation of the award and remanded the case. - covenant not to compete in the comedy club bus. for 14 years in 48 states is too broad to be enforced
when the contract will be void
- if a court has previously determined that a person is mentally incompetent, any contract made by that person is void- no contract exists - court appoints guardian to represent individual, only 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
when the contract will be voidable
- if the person did not know he/she was entering the contract or lacked the mental capacity to comprehend its nature, purpose, and consequences - court has not previously judged person to be mentally incompetent but the person was incompetent at the time the contract was formed
when the contract will be valid
- if the person had capacity at the time the contract was formed - some people who are incompetent due to age/illness have lucid intervals (temporary periods of sufficient judgment) --- during these intervals, they are considered to have legal capacity to enter into contracts
when courts will enforce exculpatory clauses
- if they are reasonable, do not violate public policy, and do not protect parties from liability for intentional misconduct - language used must not be ambiguous, and parties must have been in relatively equal bargaining positions - may also enforce in loan documents, real estate contracts, and trust agreements
Effect of illegality
- illegal contract is void (deemed never to have existed) and the courts will not aid either party
CASE: Comedy club v. improve West Associates Background
- improve is founder of improve comedy club and owner of improve trademark -CCI owns and operates restaurants and comedy clubs - improve west granted cci exclusive license to open 4 improve clubs per year - agreement prohibited cci from opening any non- improve comedy clubs in US till 2019 - cci failed to open 8 clubs by end of 2002 and improve west commenced arbitration - arbitrator found that cci forfeited its right to open improv clubs - cci couldn't open any new comedy clubs for agreements duration - federal district ct affirmed rewared, cci appealed
court concluded
- it is not required that for a release of liability for future negligence to be effective, it must identify every individual sought to be released by name - the release of "any" event sponsors and their agents and employees from liability for future negligence clearly releases all event sponsors and their agents and employees without exclusion - it is not ambiguous because it does not name each individual event sponsor it purported to release from liability - judgment of trial court is affirmed
Enforcement problems
- laws governing enforceability of covenants not to compete vary significantly from state to state
Disaffirmance
- legal avoidance or setting aside of a contractual obligation
ratification (intoxicated person)
- may ratify expressly or impliedly
contracts for necessaries
- minor can disaffirm the contract but remains liable for the reasonable value of the goods
General rule
- minor can enter into any contract that an adult can, except contracts prohibited by law for minors (examples: alcohol beverages or tobacco) - contract entered by a minor is voidable at the option of that minor, subject to certain exceptions
emancipation
- minorities status can be terminated by this , which occurs when a childs parent/legal guardian relinquishes the legal right to exercise control over the child = emancipated, when minors leave the home to support themselves - minor can petition court to be treated like an adult
disaffirmance
- person has option of disaffirming it while intoxicated and for a reasonable time after becoming sober if a contract is voidable because one party was intoxicated - person claiming to be intoxicated must be able to return all consideration received unless the contract involved necessaries
unconscionable contracts/clauses
- persons are assumed to be reasonably intelligent and courts will not come to their aid just bc they have made an unwise / foolish bargain - unconscionable bargains --- bargains so oppressive that the courts relieve innocent parties of part or all of their duties bc so unfair - UCC incorporates concept of unconscionability in its provisions with regard to sale and lease of goods
CASE: Holmes v. Multimedia KSDK, INC
- plaintiff homes signed and dated entry form for race for the cure to be held on Saturday, 2009 - one page entry form contained section saying : understand that may be removed from comp. if not follow rules of event, know that its a hazardous event and claim responsibility for injury/ accident - defendant executed a race sponsorship agreement with St. Louis affiliate of the event, agreement governed terms of KSDKs sponsorship of the event - KSDK agreed to broadcast the event and defendants were involved in arranging the coverage - Mrs. Holmes and her husband filed suit in circuit court of city of St. Louis - said that while Mrs. Holmes was a participant, she was caused to trip and fell over an audio visual box, and she got injuries - box was owned and operated by KSDK and was placed on ground without warnings in high traffic area - circuit ct entered summary judgment in defendants favor because plaintiffs claims were barred by the language of the release,, the release was not ambiguous, and the release applied to defendants plaintiffs appeals 3. plaintiffs also claimed that "any" doesn't apply bc cou4rts require more specificity in a prospective release - court disagree
exculpatory clauses
- release a party from liability in the event of monetary/ physical injury no matter who is at fault
contract reformation
- resort only when necessary to prevent undue burden or hardships - courts will reform covenants not to compete, if a covenant is found to be unreasonable in time or geographic area, court may convert the terms into reasonable ones and then enforce the reformed covenant
minors obligations on disaffirmance
- states differ on the extent of a minors obligations on disaffirmance - courts in most states hold that the minor need only return the goods subject to the contract , provided the goods are in the minors possession or control
express ratification
- takes place when the individual, on reaching age of majority, states orally/ in writing that he/ she intends to be bound by the contract
implied ratification
- takes place when the minor, on reaching age of majority, indicates an intent to abide by the contract
ratification
- the act of accepting and giving legal force to an obligation that previously was not enforceable
contractual capacity
- the legal ability to enter into a contractual relationship - capacity may be lacking or questionable when a person is young or mentally incompetent
implied (toxicated)
- when a person enters into a contract while intoxicated and fails to disaffirm the contract within a reasonable time after becoming sober
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 example) statutes that prohibit certain employees from working more than max hours - state statutes that regulate sale of insurance
justifiable ignorance of the facts
- when one of the parties is relatively innocent, that party can often recover any benefits conferred in a partially executed contract - courts will not enforce the contract but will allow the parties to return to their original positions - ex---- if someone illegally smuggled not knowing what was inside the truck, thought it was goods, gets money back
age of majority
-18 - some states provide for the termination of minority on marriage
CASE: Sturdza v. UAE in the language of the court
-Sturdza argues that districts architectural licensing statue should not be construed to apply to architects who submit plans in the district in international architectural design competitions - purpose of the law is to protect ordinary local DC consumers against fraudulent practices and reps by people holing themselves as experts - Ct not persuaded by Sturdza's argument, it is not "plain" to them that the public welfare rationale for licensing architects is innaplicable to international comps to design buildings such as the UAE embassy - for safety of people, they have reason to insist that architects who design and oversee construction are qualified and licensed to do so - must apply statute as written and not create ad hoc exceptions by judicial decree based on nebulous policy considerations -one who engages in practice of architecture in jurisdiction without having secured the necessary district of Columbia license is barred from recovering for his / her services in an action for breach of contract
contracts contrary to public policy
-contracts not enforceable because of the negative impact they would have on society
procedural unconscionability
-involves inconscpicuous print, unintelligible language, or lack of an opportunity to read the contract/ask questions about its meaning - 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 a disparity in bargaining power between 2 parties that the weaker party's consent is not voluntary - involves adhesion contract
necessaries
basic needs such as food,clothing, shelter, medical services
1. plaintiff claims the release is ambiguous
by law; if the language may be given more than one reasonable interpretation, then its ambiguous, not if they just don't agree
exceptions to a minors right to disaffirm
marriage contracts and contracts to enlist in armed services= cannot be avoided for public policy purposes - misrepresentation of age - contracts for necessaries
not executed
neither party can recover damages
contracts contrary to statute
ways in which contracts may be contrary to statute and thus illegal: - contracts to commit crime - usury -gambling