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Chapter 9: Contracts – Consideration, Capacity, and Legality. Learning Objectives. What is consideration? What is required for consideration to be legally sufficient? In what circumstances might a promise be enforced despite a lack of consideration? . Learning Objectives. - PowerPoint PPT Presentation
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Chapter 1: Legal EthicsCHAPTER 9: CONTRACTS –
CONSIDERATION, CAPACITY, AND LEGALITY
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Learning Objectives1. What is consideration? What is required for
consideration to be legally sufficient?2. In what circumstances might a promise be
enforced despite a lack of consideration?
3© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives3. Does a minor have the capacity to enter into
an enforceable contract? What does it mean to disaffirm a contract?
4. Under what circumstances will a covenant not to compete be enforceable? When will such covenants not be enforced?
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Learning Objectives5. What is an exculpatory clause? In what
circumstances might exculpatory clauses be enforced? When will they not be enforced?
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Consideration Generally, consideration must have:–“Legally Sufficient Value” and –a “Bargained-for-Exchange.”
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Consideration Legally Sufficient Value can mean:–Promise,–Performance, or–Forbearance.
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Consideration Bargained-for-Exchange: must provide
basis for the bargain.–Something of legal value (a promise, or
a performance) must be exchanged between the parties. –The promise must be either legally
detrimental to the promisee, or legally beneficial to the promisor.
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Consideration Adequacy of Consideration:–Courts typically will not consider.– Law does not protect a person from entering
into an unwise contract.–Cases of “shockingly inadequate
consideration” may raise a red flags, and be ruled unconscionable.
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Consideration Agreements That Lack Consideration.–Preexisting Duty.• Promise to do what one already has a
legal duty to do does not constitute legally sufficient consideration.• Unforeseen Difficulties. • Recession and New Contract.
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Consideration Agreements That Lack Consideration.– Past Consideration: no consideration
because the bargained-for exchange element is missing.
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Consideration Agreements That Lack Consideration.– Illusory Promises: promisor has not
definitely promised to perform because consideration is lacking, and unenforceable.
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Consideration Settlement of Claims.–Accord and Satisfaction.• Settlement for lessor amount; debt must
be in dispute.–Liquidated Debts: debt is certain, accord
and satisfaction cannot occur.–Unliquidated Debts: amount not settled.
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Consideration Settlement of Claims.–Release: Good faith, signed writing,
consideration.–Covenant Not to Sue: does not always
bar further recovery.
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Promissory Estoppel Promissory Estoppel (“detrimental
reliance”):– Doctrine applies when a person relies
on the promise of another to her legal detriment. –Promisor is “estopped” (precluded) from
revoking the promise.
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Consideration Promissory Estoppel. Elements:–Must be definite promise.–Promisee must justifiably rely on the
promise.–Reliance is substantial.–Justice will be served by enforcing
promise.
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Consideration Promissory Estoppel. –Application of the Doctrine. –CASE 9.1 HARVEY V. DOW (2011).
What actions or words did Teresa rely on to her legal detriment?
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Contractual Capacity Minors: at 18 years, a person is
emancipated, and has the legal capacity to enter into any contract that an adult can.–However, a contract entered into by a
minor is voidable at the option of that minor, and can be disaffirmed.
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Contractual Capacity Minors.–Disaffirmance.• A contract can be disaffirmed at any time
during minority, or for a reasonable period after minor is emancipated.•Minor must disaffirm the entire contract.
Disaffirmance can be expressed or implied.
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Contractual Capacity Minors.–Ratification: when minor reaches the
age of majority, he can ratify a contract created while minor.–Parents’ Liability: generally, parents are
not liable for minors, except for necessaries.
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Contractual Capacity Intoxication.–Lack of capacity at the time the contract
is being made. Contract is either voidable or valid, depending on circumstances. –Disaffirmance (voidable).–Ratification: after ‘sobering up.
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Contractual Capacity Mental Incompetence.–Void: person is adjudged mentally
incompetent by a court of law and a guardian has been appointed.
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Contractual Capacity Mental Incompetence (cont’d).–Voidable: person does not know she is
entering into the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences.
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Contractual Capacity Mental Incompetence (cont’d).–Valid: when person is able to
understand the nature and effect of entering into a contract but may lack capacity to engage in other activities (known as “lucid” intervals).
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Legality A contract must be formed for a legal
purpose. A specific clause in contract can be
illegal, but rest of contract can be enforceable.
Contract to commit a tortious act is illegal.
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Legality• Contracts Contrary to Statute.– A contract must be formed for a legal purpose.– A specific clause in contract can be illegal, but rest
of contract can be enforceable.– A contract to commit a tortious act is illegal.
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Legality• Contracts Contrary to Statute.– Any contract prohibited by federal or state
statutory law is illegal and therefore void (never existed).
– Contracts to Commit a Crime.– Contracts for Usury.
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Legality• Contracts Contrary to Statute.– Gambling: distribution of property based on
chance among persons who have paid valuable consideration.–Licensing Statutes: contract’s enforceability
depends on purpose.• CASE 9.2 STURDZA V. UNITED ARAB EMIRATES (2011). Do
you think this decision was fair?
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Legality
Contracts Contrary to Public Policy.–Contracts contrary to public policy are void.–Contracts in Restraint of Trade are
generally void.• Exception: Covenant not to Compete and Sale
of an Ongoing Business. • Exception: Covenant Not to Compete in
Employment.
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Legality
Unconscionable Contracts or Clauses.–Procedural Unconscionability:
inconspicuous print or legalese.• Depends on a party’s lack of knowledge or
expertise. –Substantive Unconscionability.• Contracts are oppressive or overly harsh;
that deny a remedy for nonperformance.
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Legality
Unconscionable Contracts or Clauses.–Substantive Unconscionability.• CASE 9.3 LHOTKA V. GEOGRAPHIC
EXPEDITIONS, INC. (2010). Why was the arbitration clause unenforceable?
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Legality
Exculpatory Clauses.–Release a party from liability in the
event of monetary or physical injury – no matter who is at fault.• Enforceable when they are not against
public policy, are not ambiguous, and do not shield parties from intentional conduct.
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Legality The Effect of Illegality.–Generally, an illegal contract is void.–Both parties are considered to be at
fault, and neither party has any rights or duties.–Courts are not generally concerned
about unjust enrichment in an illegal contract.
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Legality The Effect of Illegality.–Justifiable Ignorance of the Facts.• If one party is ‘innocent’, she can recover
if there has been unjust enrichment.• Likewise, if an innocent party has fully
performed, courts may enforce the contract against the other party.
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Legality The Effect of Illegality.–Members of Protected Classes.•When a statute protects a certain class of
people, a member of that class can enforce the contract, even though the other party cannot.
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Legality The Effect of Illegality.–Withdrawal from an Illegal Agreement.• If the contract is executory, a party can
withdraw from the contract, and recover the performance or its value.
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Legality The Effect of Illegality.–Severable, or Divisible, Contracts.• Distinct parts that can be performed
separately, with separate consideration for each part.
–Fraud, Duress, or Undue Influence.• Party to an illegal contract may be able to
recover if wrongfully induced.