1. Chapter 16 Capacity and Legality Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. 16-2 Chapter 16 Ethical Dilemma As this chapter indicates, “usury” occurs when a party gives a loan at an interest rate exceeding the legal maximum, and statutes prohibiting usury have been enacted in virtually every state. The legal maximum interest rate varies from state to state. Should the government regulate the maximum interest rate charged by lenders to borrowers, or should the “free market” dictate the interest rate charged? Without a usury cap in place, would it be ethical for a lender to charge whatever level of interest a borrower would be willing to pay?

3. 16-3 Chapter 16 Case Hypothetical and Ethical Dilemma Before her recent accident, eighty-two-year-old Lily Ledbetter was her own chauffeur. She used to drive an automobile to fulfill her once-active senior lifestyle, including outings for bridge tournaments, water aerobics, grocery shopping, bill-paying, and family get-togethers. One day, Lily decided to purchase a new automobile. Although her fifty-year-old son Ron suggested that he accompany her to the car dealership, she refused, reminding him that she was fully capable of taking care of her own responsibilities. With the “wind of independence at her back,” Lily entered the dealership, Bjorn Fjord Motors, alone. After negotiating her best deal and signing a contract for the purchase of a new Fjord Mastodon sedan, Lily drove away in her rapidly-depreciating asset. Five miles down the road, the steering wheel detached from the steering column (the steering wheel literally came off in her hands) and Lily crashed into a culvert. She sustained severe personal injuries, including (but not limited to) a broken left leg, a broken pelvis, a collapsed lung, and numerous lacerations to her face. Her attending physicians agree that Lily will never be able to drive an automobile again. Lily has since sued Fjord Motors, Inc. (the manufacturer of the sedan) and Bjorn Fjord Motors, Inc. (the dealership) for personal injury. Both companies have filed answers denying liability on the basis of an exculpatory clause included in Lily’s purchase contract. The exculpatory clause states that neither Fjord Motor, Inc. nor Bjorn Fjord Motors, Inc. is responsible to a customer or any other third party for a defect in the Fjord Mastodon that results in personal injury and/or economic harm. Both companies have also filed motions for judgment on the pleadings, requesting that the court summarily dismiss both causes of action against Fjord Motors, Inc. and Bjorn Fjord Motors, Inc. on the basis of the contract’s exculpatory clause. Should the court grant the defendants’ requests for judgment on the pleadings? Is the exculpatory clause enforceable against Lily Ledbetter?

4. 16-4 Chapter 16 Case Hypothetical and Ethical Dilemma Tommy McCartney is a sixteen-year-old high school student. He has worked forty hours per week at the local convenience store over the last year, and has diligently saved $6,000 for the purchase of his first car. While visiting a local car dealership, Tommy finds the “car of his dreams,” a used yellow Camaro. Tommy walks into the dealership, announces to the dealership owner that he is “ready to buy,” negotiates $6,000 as the purchase price, and leaves the dealership a proud car owner. Over the course of the next six months, Tommy drives the Camaro eight thousand miles, wears the tires thin, dents the left front fender, and regrets his purchase. He realizes that in two short years college will beckon, and he knows that his parents cannot afford to pay for his higher education. In short, he wants his money back. On a Saturday morning, Tommy returns to the car dealership, walks into the sales office, and hands the keys to the seller, asking for the return of his $6,000. The dealer chuckles, and then his look turns stern, saying “Son, I don’t owe you anything. You’ve just learned a lesson in the ‘School of Hard Knocks.’ The car is still yours, and the money is still mine!” Who will prevail? Is it legal and/or ethical to allow Tommy to escape his contractual obligations?

5. Contractual Capacity (Definition): Mental ability to understand rights and obligations established by contract, with the presumptive ability to understand how to comply with terms of agreement 16-5

6. Contractual Capacity General Rule of Law: Natural persons over the age of majority (18 in most states) are presumed to have the full legal capacity to enter into binding legal contracts 16-6

7. 16-7 Individuals Who Have Only Limited Capacity to Contract Minors Minors Those suffering from mental deficiency that renders them incapable of understanding the nature and obligations of contracts Those suffering from mental deficiency that renders them incapable of understanding the nature and obligations of contracts Those who are intoxicated Those who are intoxicated

8. 16-8 Rules Regarding Minor’s “Contractual Power of Avoidance” Disaffirmance (“Power of Avoidance”): Minors’ right, until reasonable time after reaching age of majority, to disaffirm/avoid their contracts Disaffirmance (“Power of Avoidance”): Minors’ right, until reasonable time after reaching age of majority, to disaffirm/avoid their contracts To exercise right, minor need only demonstrate, through words and/or actions, intent to rescind contract To exercise right, minor need only demonstrate, through words and/or actions, intent to rescind contract Minor must return any consideration received (if still in minor’s possession/control), regardless of condition Minor must return any consideration received (if still in minor’s possession/control), regardless of condition Even if consideration damaged/destroyed, other party has no recourse against minor Even if consideration damaged/destroyed, other party has no recourse against minor Rules designed to discourage competent parties from entering into contracts with minors Rules designed to discourage competent parties from entering into contracts with minors

9. 16-9 Exceptions to Minor’s Right to Disaffirm Contract Contract for Necessaries (Definition): Contracts that supply minor with basic necessities of life Contract for Necessaries (Definition): Contracts that supply minor with basic necessities of life Examples: food, clothing, shelter, basic medical services Examples: food, clothing, shelter, basic medical services Ratification (Definition): Acceptance of terms of contract (entered into as a minor) after reaching age of majority Ratification (Definition): Acceptance of terms of contract (entered into as a minor) after reaching age of majority Express Ratification: Occurs when, after reaching age of majority, individual states (either orally or in writing) that he/she intends to be bound by contract entered into while a minor Express Ratification: Occurs when, after reaching age of majority, individual states (either orally or in writing) that he/she intends to be bound by contract entered into while a minor Implied Ratification: Occurs when former minor takes action after reaching age of majority consistent with intent to ratify contract Implied Ratification: Occurs when former minor takes action after reaching age of majority consistent with intent to ratify contract

10. 16-10 Parental Liability for Minors’ Contracts, Necessaries, and Torts General Rule: Parents not liable for contracts entered into by their minor children General Rule: Parents not liable for contracts entered into by their minor children Exception: Contracts for necessaries Exception: Contracts for necessaries General Rule: Parents not liable for torts committed by their minor children General Rule: Parents not liable for torts committed by their minor children Exception: Failure to properly supervise child, subjecting others to unreasonable risk of harm from the child Exception: Failure to properly supervise child, subjecting others to unreasonable risk of harm from the child

11. 16-11 Individuals Having No Capacity to Contract Those adjudicated insane Those adjudicated insane Those adjudicated habitually intoxicated Those adjudicated habitually intoxicated Those with appointed legal guardians Those with appointed legal guardians

12. 16-12 Rules Regarding Intoxication General Rule: Contracts made by intoxicated persons are voidable General Rule: Contracts made by intoxicated persons are voidable If intoxication merely causes person to exercise poor judgment, contract not voidable unless other party unfairly capitalized on the impaired judgment If intoxication merely causes person to exercise poor judgment, contract not voidable unless other party unfairly capitalized on the impaired judgment When intoxicated person becomes sober, contract can be ratified or disaffirmed; however, courts will liberally interpret behavior that seems likes ratification once intoxicated person becomes sober When intoxicated person becomes sober, contract can be ratified or disaffirmed; however, courts will liberally interpret behavior that seems likes ratification once intoxicated person becomes sober

13. 16-13 Illegal Contracts Contracts with no legal purpose and/or subject matter Contracts with no legal purpose and/or subject matter Example: Agreement to commit crime/tort Example: Agreement to commit crime/tort Contracts violating statute(s) and/or “public policy” Contracts violating statute(s) and/or “public policy” Example: Usurious loan agreement (loan contract exceeding state- imposed maximum interest rate) Example: Usurious loan agreement (loan contract exceeding state- imposed maximum interest rate) Example: Unconscionable contract (Agreement so unfair that it is “void of conscience”) Example: Unconscionable contract (Agreement so unfair that it is “void of conscience”)