Capacity and Legality BA 18 CHAPTER 11. © 2000. West Legal Studies. Chapter 122 CONTRACTLAW CONTRACT (Written Verbal Implied Assumed) RESPONSIBILITIES

Capacity and Legality

BA 18CHAPTER 11

Capacity and Legality

BA 18CHAPTER 11

© 2000. West Legal Studies. Chapter 12 2

CONTRACTCONTRACTLAWLAW

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Review of Contracts


Classifications of Contracts: Give an example of eachClassifications of Contracts: Give an example of each

Bilateral andUnilateral

Bilateral andUnilateral

QuickQuickQuizQuiz

QuickQuickQuizQuiz

Voidable,Unenforceable,

Valid, Void

Voidable,Unenforceable,

Valid, Void

Executed andExecutory

Executed andExecutory

Formal andInformal

Formal andInformal

Express andImplied

Express andImplied

Quasi-contractsQuasi-

contracts

CONTRACTS


Termination of an OfferTermination of an Offer

Terminationby Acts of the

Parties

Terminationby Acts of the

Parties

Revocationby Offeror

Revocationby Offeror

Rejection byOfferee

Rejection byOfferee

Counterofferby Offeree

Counterofferby Offeree


Termination of an OfferTermination of an OfferChap. 9

Destructionof Subject

Matter

Destructionof Subject

Matter

Death orIncompetency

Death orIncompetency

SuperveningIllegality

SuperveningIllegality

Lapseof TimeLapse

of Time

Terminationby Operation

of the Law

Terminationby Operation

of the Law

Legal Capacity and other Issues


LEGAL CAPACITYLEGAL CAPACITY

For a contract to be considered valid and For a contract to be considered valid and enforceable, the parties must have the legal enforceable, the parties must have the legal ability to bind themselves to the agreement.ability to bind themselves to the agreement.

Incapacity is the exception, not the rule.Incapacity is the exception, not the rule. Burden of proof regarding incapacity falls Burden of proof regarding incapacity falls

on the party raising it as a defense to on the party raising it as a defense to enforce the contract or as basis for enforce the contract or as basis for rescission of the contract.rescission of the contract.


LEGAL CAPACITYLEGAL CAPACITY

Law determines contractual capacity by looking at Law determines contractual capacity by looking at the relative bargain power of the parties.the relative bargain power of the parties.

Issues of contractual capacity can arise if contract Issues of contractual capacity can arise if contract involves minors, persons lacking mental capacity, involves minors, persons lacking mental capacity, aliens, convicts, and in some states-married aliens, convicts, and in some states-married women.women.

Contracts made by these people may be absolutely Contracts made by these people may be absolutely void, voidable (the insane), or valid (if lucid when void, voidable (the insane), or valid (if lucid when contract was formed).contract was formed).


MINORSMINORS Most states no longer use common law but instead Most states no longer use common law but instead

use statutory law.use statutory law. Common Law: anyone under the age of Common Law: anyone under the age of

21.21. Statutory Law: in most states those under Statutory Law: in most states those under

the age of 18. the age of 18. Some states allow for termination of infancy status Some states allow for termination of infancy status

upon marriage or emancipation.upon marriage or emancipation. Emancipation: free from the control or Emancipation: free from the control or

power of another.power of another.


MINORSMINORS Disaffirmance/RecissionDisaffirmance/Recission

To protect minors in dealing with adults, the law To protect minors in dealing with adults, the law allows minors to disaffirm (avoid) their contract.allows minors to disaffirm (avoid) their contract.

Except in certain specialized cases.Except in certain specialized cases.Necessaries.Necessaries.

Disaffirms contract, action results in a voidable Disaffirms contract, action results in a voidable contract. contract.

The right to disaffirm is The right to disaffirm is absolute and personal absolute and personal to the minor.to the minor.


MINORSMINORS Disaffirmance must be in total to be effective.Disaffirmance must be in total to be effective. Minor can disaffirm either expressly (verbal or Minor can disaffirm either expressly (verbal or

written) or implied by course of conduct.written) or implied by course of conduct. For disaffirmance to be effective, minor must For disaffirmance to be effective, minor must

objectively manifest intent not to be bound by objectively manifest intent not to be bound by the contract.the contract.

Duty of Restoration: the minor must return to Duty of Restoration: the minor must return to the adult the property or other consideration the adult the property or other consideration that was the object of the contract. that was the object of the contract.


MINORSMINORS Rescission: ability to have the contract set aside.Rescission: ability to have the contract set aside.

Parent or other adult co-sign the Parent or other adult co-sign the contract.contract.

Misrepresentation of Age.Misrepresentation of Age. Minor intentionally misrepresents age.Minor intentionally misrepresents age. The contract can be voided anytime during age The contract can be voided anytime during age

of minority or a reasonable time upon reaching of minority or a reasonable time upon reaching the age of majority.the age of majority.

Power of disaffirmance, whether contract is Power of disaffirmance, whether contract is executory or executed.executory or executed.


Ratification If a minor does not disaffirm a contract either If a minor does not disaffirm a contract either

during the period of minority or within a during the period of minority or within a reasonable time after reaching the age of majority:reasonable time after reaching the age of majority: The contract is considered The contract is considered ratifiedratified (accepted).(accepted). The minor (now an adult) is bound by the The minor (now an adult) is bound by the

contract.contract. The right to disaffirm the contract has been lost.The right to disaffirm the contract has been lost.


Necessaries of Life Minors are obligated to pay for the Minors are obligated to pay for the

necessaries of lifenecessaries of life:: Food, Shelter, Clothing, Medical ServicesFood, Shelter, Clothing, Medical Services

The seller’s recovery is based on the equitable The seller’s recovery is based on the equitable doctrine of doctrine of quasi-contractquasi-contract rather than on the rather than on the contract itself.contract itself. The minor is obligated only to pay the The minor is obligated only to pay the

reasonable value of the goods or services.reasonable value of the goods or services.


Parent’s Liability for Their Children’s Contracts

Parents owe a legal duty to provide food, Parents owe a legal duty to provide food, clothing, shelter, and other clothing, shelter, and other necessaries of necessaries of lifelife for their minor children. for their minor children.

Parents are liable for their children’s Parents are liable for their children’s contracts for necessariescontracts for necessaries of life if they of life if they have not adequately provided such items.have not adequately provided such items.

The parental duty of support terminates if a The parental duty of support terminates if a minor becomes minor becomes emancipatedemancipated..


Mental Capacity


INSANE PERSONS

Lack the capacity to make a binding Lack the capacity to make a binding contract.contract.

Person must be so mentally infirm or Person must be so mentally infirm or deranged.deranged.

Lunacy, mental retardation, senility, alcohol Lunacy, mental retardation, senility, alcohol or drug abuse are irrelevant.or drug abuse are irrelevant.


INSANE PERSONS

Effects of Transactions by Insane Persons.Effects of Transactions by Insane Persons. Guardian has the legal capacity to Guardian has the legal capacity to

contract.contract. To disaffirm a contract, person must To disaffirm a contract, person must

prove insanity at the time of contracting.prove insanity at the time of contracting. To determine if transaction is void, To determine if transaction is void,

voidable or enforceable depends on facts.voidable or enforceable depends on facts. Contract is absolutely void if court Contract is absolutely void if court

judges insanity.judges insanity. Insane person regains sanity the Insane person regains sanity the

person may ratify contract made person may ratify contract made during period of insanity. during period of insanity.

Wednesday, Aug. 8, 2001. Yates is accused of drowning her five children. Parnham pleaded Yates not guilty by reason of insanity.


INSANE PERSONS

Necessaries.Necessaries. Law makes insane persons liable for Law makes insane persons liable for

necessaries in quasi contract.necessaries in quasi contract. Fewer controversies arise regarding Fewer controversies arise regarding

whether medical or legal services are whether medical or legal services are necessaries. necessaries.


INTOXICATED PERSONSINTOXICATED PERSONS Validity of a contract Validity of a contract

depends on the degree of depends on the degree of intoxication.intoxication. If intoxication limits If intoxication limits

mental capacity ofmental capacity ofthe individual, contract is the individual, contract is

voidable at thevoidable at theoption of the intoxicated option of the intoxicated

person. If mentalperson. If mentalcapacity is not affected, capacity is not affected, contract is valid and contract is valid and

enforceable. enforceable.


Intoxicated Person

A person who is under contractual A person who is under contractual incapacity because of ingestion of alcohol incapacity because of ingestion of alcohol or drugs to the point of incompetence.or drugs to the point of incompetence.

Most states provide that contracts entered Most states provide that contracts entered into by such intoxicated persons are into by such intoxicated persons are voidable by that person.voidable by that person.

The contract is not voidable by the other The contract is not voidable by the other party if that party had contractual capacity.party if that party had contractual capacity.

Contracts Contrary to Statues


STATUTE OF FRAUDSSTATUTE OF FRAUDS Types of Contracts covered under the statute:Types of Contracts covered under the statute:

Contracts answering for the debts of others if person defaults.Contracts answering for the debts of others if person defaults. Contracts for interests in land.Contracts for interests in land. Contracts not to be performed within one year of their Contracts not to be performed within one year of their

making.making. Promises of executors and administrators of estates.Promises of executors and administrators of estates. Contracts made in consideration of marriage.Contracts made in consideration of marriage. Contracts for sale of goods priced at $500 or more or the Contracts for sale of goods priced at $500 or more or the

lease of goods for $1,000 or more.lease of goods for $1,000 or more.


MALA IN SE AND MALA PROHIBITA BARGAINS

Court distinguish between Court distinguish between mala in semala in se and and mala prohibitamala prohibita..Mala in seMala in se:: bargains that violate statutes bargains that violate statutes

because they are because they are evil in themselvesevil in themselves..Mala prohibitaMala prohibita:: bargains that have been bargains that have been

merely forbidden by statute. merely forbidden by statute.


Car Theft?

Bill’s parents decided to Bill’s parents decided to sell Bill’s car because it sell Bill’s car because it was taking up too much was taking up too much room in the garage. His room in the garage. His parents sold the car for parents sold the car for $5500.00. When Bill $5500.00. When Bill returned home from returned home from college, his car had been college, his car had been sold. Bill had clear title sold. Bill had clear title of the car, however, his of the car, however, his parents had access to the parents had access to the pink slip.pink slip. (Family dog not included..)


Car Theft?

Was the sale between Bill’s Was the sale between Bill’s parents and the buyer parents and the buyer legal? Was this a theft?legal? Was this a theft?

Was the car sold under Was the car sold under fraudulent terms?fraudulent terms?

If Bill decided that he If Bill decided that he wanted his car back, could wanted his car back, could the contract/sale be voided?the contract/sale be voided?

If he didn’t want the car If he didn’t want the car back, who should receive back, who should receive the money from the sale?the money from the sale?


AGREEMENTS VIOLATIVE OF STATUTES Usury Statutes:Usury Statutes: loaning money at a loaning money at a

greater profit (or interest rate) than the law greater profit (or interest rate) than the law permits. permits. (This covers all loaning institutes (This covers all loaning institutes such as banks, credit unions, etc.)such as banks, credit unions, etc.) For For usuryusury to exist, there must be a loan of to exist, there must be a loan of money for which the debtor agrees to money for which the debtor agrees to repay the principal at a rate that exceeds repay the principal at a rate that exceeds the legal rate of interest. the legal rate of interest.


AGREEMENTS VIOLATIVE OF STATUTESAGREEMENTS VIOLATIVE OF STATUTES

Price-Fixing Agreements:Price-Fixing Agreements: generally to generally to restrain competition so as to create a restrain competition so as to create a monopoly or oligopoly in order to control monopoly or oligopoly in order to control price fluctuations. price fluctuations.

Performance of Services Without a License:Performance of Services Without a License: absence of license bargain is absence of license bargain is unenforceable. License is to protect public unenforceable. License is to protect public from unqualified persons.from unqualified persons.


Performance of Services Without a LicenseNote:Note: Some states require licensing primarily Some states require licensing primarily

as a as a revenue-producingrevenue-producing mechanism mechanism rather rather than as a device for protecting the health than as a device for protecting the health and welfare of its citizens.and welfare of its citizens. If the primary If the primary intent of the license requirement is to intent of the license requirement is to produce revenue, the lack of a license will produce revenue, the lack of a license will not affect the contract between parties.not affect the contract between parties.


AGREEMENTS VIOLATIVE OF PUBLIC POLICYAGREEMENTS VIOLATIVE OF PUBLIC POLICY Covenant Not to Compete:Covenant Not to Compete: also called also called

restrictive covenantsrestrictive covenants, express promises that a , express promises that a seller of a business or an employee who leaves seller of a business or an employee who leaves a company will not engage in the same or a company will not engage in the same or similar business or occupation for a period of similar business or occupation for a period of time in a certain geographic area. time in a certain geographic area. Such Such bargains may or may not be legal.bargains may or may not be legal. Let’s take a Let’s take a look…look…


Using a Covenant Not to Compete with a Sale of a Business

Covenants not to compete that are Covenants not to compete that are ancillaryancillary to a legitimate sale of a business to a legitimate sale of a business or employment contract are lawful if they or employment contract are lawful if they are reasonable in three aspects:are reasonable in three aspects:

1.1. The line of business protected.The line of business protected.

2.2. The geographical area protected.The geographical area protected.

3.3. The duration of the restriction.The duration of the restriction.


Rewriting Restrictive Covenants:

Compete clauses are illegal if:Compete clauses are illegal if:- The sole purpose is used to curtail competition- The sole purpose is used to curtail competition- Places an undue restraint on trade.- Places an undue restraint on trade.- Violates antitrust laws.- Violates antitrust laws.- Contains unreasonable restrictions - Contains unreasonable restrictions

Courts have the Courts have the right right to to “Blue-Pencil”“Blue-Pencil” or “rewrite” or “rewrite” the contract to make the covenant fair and legal to the contract to make the covenant fair and legal to both parties.both parties.


AGREEMENTS VIOLATIVE OF PUBLIC POLICY Exculpatory Clauses:Exculpatory Clauses: Avoiding Avoiding

liability by excusing one’s self from liability by excusing one’s self from another's actions.another's actions.


Exculpatory Clauses:

Businesses often use Businesses often use

exculpatory clauses as a exculpatory clauses as a

way to avoid primary way to avoid primary

responsibility.responsibility.

As an example:As an example:

““This garage is not responsible for stolen This garage is not responsible for stolen or missing items. Please lock your car or missing items. Please lock your car and take all your valuables with you.” and take all your valuables with you.”



EXCEPTIONS: UPHOLDING ILLEGAL AGREEMENTSEXCEPTIONS: UPHOLDING ILLEGAL AGREEMENTS

Parties Not in Parties Not in Pari DelictoPari Delicto:: Parties not Parties not equally at fault.equally at fault.

Repentance:Repentance: parties try and undo or rescind parties try and undo or rescind illegal agreement before illegal agreement before the legal the legal completioncompletion..

Partial Illegality:Partial Illegality: unenforceable parts of the unenforceable parts of the bargain that are illegal. bargain that are illegal.


Valid, Voidable, or Void?Valid, Voidable, or Void?

A minor who makes a contract and does not A minor who makes a contract and does not disaffirm it before her 18th birthday.disaffirm it before her 18th birthday.

ValidValid A mentally ill person who has not been judicially A mentally ill person who has not been judicially

declared insane.declared insane.VoidableVoidable

An intoxicated person who contracts to charge a An intoxicated person who contracts to charge a client with a usurious loan rate.client with a usurious loan rate.

VoidVoid

A minor who makes a contract and does not A minor who makes a contract and does not disaffirm it before her 18th birthday.disaffirm it before her 18th birthday.

ValidValid A mentally ill person who has not been judicially A mentally ill person who has not been judicially

declared insane.declared insane.VoidableVoidable

An intoxicated person who contracts to charge a An intoxicated person who contracts to charge a client with a usurious loan rate.client with a usurious loan rate.

VoidVoid

Chap. 12QuestionQuestionforfor

ThoughtThought

QuestionQuestionforfor

ThoughtThought


Questions for Review:

1.1. What is meant by legal Capacity?What is meant by legal Capacity?

2.2. What is the span of the age range that What is the span of the age range that minors are protected via common law? minors are protected via common law?

3.3. What is a Duty of Restoration? What is a Duty of Restoration?

4.4. What are three stipulations that can render What are three stipulations that can render a contract void?a contract void?


Questions for Review:

5.5. What does What does disaffirm mean?disaffirm mean?

6.6. What does What does Ratification mean?Ratification mean?

7.7. If a minor makes a contract and does not If a minor makes a contract and does not disaffirm it before her 18th birthday, the disaffirm it before her 18th birthday, the contract is ___________.contract is ___________.


THE REQUIREMENT OF REALITY OF CONSENT Law has to ascertain whether consent given Law has to ascertain whether consent given

by parties is by parties is real or whether the facts differ real or whether the facts differ from those to which the parties have agreed.from those to which the parties have agreed.

Law requires reality of consent as a Law requires reality of consent as a prerequisite to form a contractprerequisite to form a contract..


UNCONSCIONABILITY

May signal a lack of meaningful assent to a May signal a lack of meaningful assent to a contract.contract.

May justify a court’s subsequent May justify a court’s subsequent intervention on behalf of the injured party.intervention on behalf of the injured party.


http://www.snopes.com/business/deals/pepsijet.asp

http://www.youtube.com/watch?v=ZdackF2H7Qc


Websites to View:Websites to View: Legal Information Institute (LII), Contract Law

Materialshttp://wwwsecure.law.cornell.edu/topics/http://wwwsecure.law.cornell.edu/topics/contracts.htmlcontracts.html

The American Law Institute (ALI)The American Law Institute (ALI) http://www.ali.orghttp://www.ali.org


ON-LINE RESOURCES

Sherman Antitrust Act Clayton Act Federal Trade Commission Act

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Capacity and Legality BA 18 CHAPTER 11. © 2000. West Legal Studies. Chapter 122 CONTRACTLAW CONTRACT (Written Verbal Implied Assumed) RESPONSIBILITIES