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Chapters 16 & 17 Capacity and Legality & Legal Assent.

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1 Chapters 16 & 17 Capacity and Legality & Legal Assent

2 Hypothetical 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? 2

3 3 Capacity o Contractual Capacity. o The legal ability to enter into a contractual relationship. o Legality. o The agreement must not call for the performance of any act that is criminal, tortious, or otherwise opposed to public policy. o Minors

4 Capacity of Minors o Contracts with minors are voidable o Can disaffirm the contract after reaching the age of majority o Entire contract only, not part o Exception o Contract for necessaries o Food, clothing, shelter, basic medical o Ratification o Once minor reaches age of majority, they can legally affirm the contract o Parents generally not liable for their minor children 4

5 5 Intoxication o Lack of contractual capacity at the time the contract is being made. o Contract can be either voidable or valid. o Courts look at objective indications to determine if contract is voidable. o If voidable: o Person has the option to disaffirm, or o Person may ratify the contract expressly or impliedly.

6 6 Mental Incompetence o Void. o If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed. o Voidable. o If the person does not know he or she is entering into the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences. o Valid. o If person is able to understand the nature and effect of entering into a contract yet lack capacity to engage in other activities. o Lucid Interval.

7 7 Legality o A contract to do something prohibited by federal or state statutory law is illegal and therefore void (never existed). o Contract that calls for for a tortious act. o Contract that calls for an act contrary to public policy. o Restraints of trade – covenant not to compete o Adhesion Contracts o Licensing statutes o People in certain fields must have a license to legally enter into an agreement to perform the service.

8 Hypothetical o For Greta Harrington and her husband Robert, it was love at first sight. The two were married for 52 years until cancer took her husband at the age of 84. Greta is currently 83 years old, and her marriage produced three offspring: Samuel, 50 years old; Katherine, 45 years old; and Benjamin, 40 years old. In his will, Robert left all of his financial interests, a considerable sum valued at $5 million, entirely to his wife; in his will, he also expressed love and affection for his three children, as well as the desire that Greta devise the remainder of the couple’s estate to their children, in equal portions, upon her death. Greta has recently been “keeping company” with Gary Watson, a twice- divorced, 65-year-old bachelor with a reputation for “womanizing.” While visiting her mother one weekend, Katherine is shocked to see a fully- executed will on the desk in the living room, devising all of her mother’s estate to Gary Watson. She immediately calls Samuel and Benjamin, schedules an emergency “sibling meeting” for Sunday, and wonders what to do about her mother’s ill-advised decision. She has noticed in recent months that her mother is often forgetful, frequently calls her “Sharon” (her aunt’s name,) and often confuses the days of the week. Do the children have any legal rights in terms of successfully invalidating Greta Harrington’s will? From a legal and/or ethical standpoint, should a mother (even of adult children) be allowed to “disinherit” her offspring? 8

9 9 Genuineness of Assent o Contract may be unenforceable if the parties have not genuinely assented to its terms by: o Mistakes. o Misrepresentation. o Undue Influence. o Duress.

10 10 Mistakes o Only a Mistake of Fact allows a contract to be canceled. Mistake of Value is enforceable. o Bilateral (Mutual) Mistakes can be rescinded by either party if all three elements are met: o Basic assumption about the subject matter of the contract o Material effect on the agreement o Adverse effect on a party who did not agree to bear the risk of mistake at the time of the agreement – “as is”

11 11 Mistakes o Unilateral Mistakes cannot be canceled unless: o If other party to the contract knows or should have known that a mistake of fact was made. o If mistake was due to mathematical mistake in addition, summation, subtraction, division, or multiplication and was made inadvertently and without gross negligence.

12 12 Fraudulent Misrepresentation o Contract Voidable by Innocent Party. o Elements: o Misrepresentation of Material Fact. o Intent to Deceive (Scienter). o Reliance on Misrepresentation. o Injury to the Innocent Party.

13 13 Nonfraudulent Misrepresentation o Innocent Misrepresentation. o Negligent Misrepresentation. o Equal to Scienter. o Is treated as fraudulent misrepresentation, even though the misrepresentation was not purposeful.

14 14 Undue Influence o Contract is Voidable. o Confidential or Fiduciary Relationship. o Relationship of dependence. o Influence or Persuasion. o Weak party talked into doing something not beneficial to him or herself. o Presumption of Undue Influence.

15 15 Duress o Forcing a party to enter into a contract under fear or threat makes the contract voidable. o Threatened act must be wrongful or illegal. o Exceptions: o Threat to exercise legal rights (criminal or civil suit). o Economic.

16 Duress o One party threatens physical harm or extortion to gain consent to contract o One party threatens to file criminal lawsuit unless consent given to terms of contract o One party threatens to file frivolous civil lawsuit unless consent given to terms of contract o One party threatens the other’s economic interests (although in many jurisdictions, recovery based on economic duress/pressure rarely granted) 16

17 17 Adhesion Contracts and Unconscionability o Adhesion Contracts. o Preprinted contract in which the adhering party has no opportunity to negotiate the terms of the contract. o Unconscionability. o One sided bargains in which one party has substantially superior bargaining power and can dictate the terms of the contract. o “Standard-form.” o “Take-it-or-leave-it” adhesion contracts.


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