Chapter 14 - Capacity and Legality

exculpatory clauses

A clause that releases a contractual party from liability in the event of monetary or physical injury, no matter who is at fault.

valid

A contract entered into by a mentally incompetent person, whom a court has not previously declared incompetent, may also be ______ if the person had capacity at the time the contract was formed

severable/divisble

A contract might include a clause stating that the parties intend the contract terms to be enforced to "the fullest extent possible." Such a clause indicates that the parties regard their contract as _____ and, in the event of a dispute, want the court to strike out the illegal terms and enforce the rest.

covenant not to compete

A contractual promise to refrain from competing with another party for a certain period of time and within a certain geographic area. Although _____ restrain trade, they are commonly found in partnership agreements, business sale agreements, and employment contracts. If they are ancillary to such agreements, they will normally be enforced by the courts unless the time period or geographic area is deemed unreasonable.

unconscionable contract

A valid contract rendered unenforceable by some statute or law.

usury

Charging an illegal rate of interest

void

If a court has declared a person to be mentally incompetent and has appointed a legal guardian, any contract made by that person (the incompetent person) is _____ from the outset.

valid

If a court has not declared a person mentally incompetent and that person was able to understand the nature and effect of the contract at the time it was formed, then the contract is _____ and enforceable

voidable

If a court has not declared a person mentally incompetent, but that person lacked the capacity to comprehend the subject matter, nature, and consequences of the agreement, then the contract is _____ at that person's option.

voidable

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 _____

void

If a court has previously determined that a person is mentally incompetent, any contract made by that person is _____

emancipation

In regard to minors, the act of being freed from parental control; occurs when a child's parent or legal guardian relinquishes the legal right to exercise control over the child. Normally, a minor who leaves home to support himself or herself is considered emancipated.

age of majority

The age at which an individual is considered legally capable of conducting himself or herself responsibly. A person of this age is entitled to the full rights of citizenship, including the right to vote. In contract law, the age at which one is no longer an infant and can no longer disaffirm a contract.

disaffirmance

The legal avoidance, or setting aside, of a contractual obligation.

True. (p.283) Courts do enforce exculpatory clauses if they are reasonable, do not violate public policy, and do not protect parties from liability for intentional misconduct. (businesses such as health clubs, racetracks, amusement parks, skiing facilities, and skydiving organizations use exculpatory clauses to limit their liability for patron's injuries.)

True or False: Courts usually hold that exculpatory clauses are against public policy

False. when one of the parties is relatively innocent (has no reason to know that the contract is illegal), that party can often recover any benefits conferred in a partially executed contract. (p.285)

True or False: Even though one of the parties is relatively innocent and has no reason to know that the contract is illegal, then that party is still not able to recover any benefits conferred in a partially executed contract.

False. 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. (p.286)

True or False: If a contract is divisible into legal and illegal portions, a court will not enforce any part of the contract, since a portion of the contract was illegal.

False. Ordinarily, minors can disaffirm contracts even when they have misrepresented their age, claimed to be twenty-one years old when they were not. nevertheless, a growing number of states have enacted laws to prohibit disaffirmance in such situations. (p.274)

True or False: If minors misrepresent their age on a contract, then he or she will be held responsible at that "false" age.

True. (p.285)

True or False: In an illegal contract, if the contract is executory, neither the party can enforce the contract and if it has been executed, then neither party can recover damages

True. (p.286)

True or False: 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.

True. (p.286)

True or False: 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.

True. Persons are assumed to be reasonably intelligent, and the courts will not come to their aid just because they have made an unwise or foolish bargain (p.281)

True or False: a court ordinarily does not look at the fairness or equity of a contract

False. the minor is only able to disaffirm the entire contract through words or conduct. (p.273)

True or False: a minor is able to either disaffirm the entire contract or merely a portion of it.

True. (p.274)

True or False: a minor who enters into a contract for necessaries may disaffirm the contract but remains liable for the reasonable value of the goods.

True. (p.273)

True or False: a person who has determined by a court to be mentally incompetent cannot form a legally binding contract with another party.

False: parents are not liable for contracts made by minor children acting on their own. (p.275)

True or False: as a general rule, parents are liable for contracts made by minor children acting on their own

True. an exception is recognized when the restrain is reasonable and is contained in an ancillary (secondary or subordinate) clause in a contract (p.279)

True or False: contracts in restraint of trade usually adversely affect the public policy that favors competition in the economy and therefore is not enforceable.

True. (p.276)

True or False: during lucid intervals, a person will be considered to have legal capacity to enter into contracts.

False. a contract can ordinarily be disaffirmed at any time during minority or for a reasonable period after reaching majority (p.274)

True or False: if a minor is wanting to disaffirm a contract, he or she must disaffirm at any time during minority.

True. However, if despite intoxication, the person understood the legal consequences of the agreement, the contract will be enforceable. (p.275)

True or False: if a person was sufficiently intoxicated to lack mental capacity, then the agreement may be voidable even if the intoxication was purely voluntary.

True. (p.285)

True or False: in most illegal contracts, both parties are considered to be equally at fault- in pari delicto

True. (p.278)

True or False: it is sometimes difficult to distinguish a gambling contract from the risk sharing inherent in almost all contracts

True. (p.274)

True or False: marriage contracts and contracts to enlist in the armed services cannot be avoided by minors

True. (p.280)

True or False: to be reasonable, a restriction on competition must protect a legitimate business interest and must not be any greater than necessary to protect that interest.

express

_____ ratification 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 the contract

implied

_____ ratification takes place when the minor, on reaching the age of majority, indicates an intent to abide by the contract.

substantive

_____ unconscionability occurs when contracts, or portions of contracts, are oppressive or overly harsh. (one-sided)

procedural

_____ unconscionability often involves inconspicuous print, unintelligible language ("legalese"), or the lack of an opportunity to read the contract or ask questions about its meaning.

unconscionable

a contract clause that gives the business entity free access to the courts but requires the other party to arbitrate any dispute with the firm may be ______

severable

a contract that is _____ consists of distinct parts that can be performed separately, with separate consideration provided for each part

indivisible

a contract that is _____, complete performance by each party is essential, even if the contract contains a number of seemingly separate provisions

reformation

a court-ordered correction of a written contract so that it reflects the true intentions of the parties.

ratify

a minor who has reached the age of majority can _____ a contract expressly or impliedly.

contracts to commit a crime

always illegal

contracts to commit a tort

always unenforceable

1. contracts in restraint of trade. 2. contracts to commit a tort. 3. unconscionable contracts. 4. adhesion contracts. 5. exculpatory clauses. 6. discriminatory contracts.

contracts contrary to public policy

1. usurious loans. 2. gambling contracts. 3. contracts to commit a crime. 4. contracts by unlicensed persons.

contracts contrary to statute

enforceable

if the statute's purpose is merely to raise government revenues, then a contract involving an unlicensed person may be [enforceable or unenforceable]

unenforceable

if the statute's purpose is to protect the public from unauthorized practitioners, then a contract involving an unlicensed practitioner is generally [enforceable or unenforceable]

gambling contracts

illegal depending on state statute

usurious loans

illegal if the interest rate exceeds legal limit

discriminatory contracts

illegal when discrimination is based on race, religion, national origin, or gender

adhesion contracts

is a contract written exclusively by one party and presented to the other on a take-it-or-leave-it basis.

exculpatory clauses

may be deemed unconscionable

contracts by unlicensed person

may not be enforceable depending on the purpose of the statute

unconscionable contracts

must not be so unfair as to be oppressive

contracts in restraint of trade

normally unenforceable, unless the restraint is reasonable under the circumstances, such as in some covenants not to compete

lucid intervals

temporary periods of sufficient intelligence, judgement, and will.

necessaries

things required for life, such as food, shelter, clothing, and medical attention; may include whatever is believed to be necessary to maintain a person's standard of living or financial and social status.