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ELEMENTS OF CONTRACT: CAPACITY and LEGALITY. 5.1 CAPACITY and LEGALITY Capacity- Legal ability to enter into a contract Assumption that another person.

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Presentation on theme: "ELEMENTS OF CONTRACT: CAPACITY and LEGALITY. 5.1 CAPACITY and LEGALITY Capacity- Legal ability to enter into a contract Assumption that another person."— Presentation transcript:


2 5.1 CAPACITY and LEGALITY Capacity- Legal ability to enter into a contract Assumption that another person has the capacity to enter into a contract is called rebuttable presumption. Law allows some people to say after the fact that they did not have the capacity to enter into a contract The law states several types of people may have the right to get out of a contract Minors People with mental impairments People under the influence of drugs or alcohol.

3 People with Mental Impairments People with mental impairments can argue that they cannot be bound by contracts. Mental problem must have made it impossible for the person to understand what was going on when the contract was made. ONLY doctors can determine if someone is mentally impaired If a person needs someone to take care of them (a guardian), then all of their contracts are void. A contract made by a person with a mental impairment can be considered valid if the person completely knew what they were doing at the time of the contract.

4 MINORS Most of the time, minors can enter into and honor contracts. Also allowed to get out of contracts Considered by law to be: Too inexperienced Immature Unknowledgeable Naïve Adults can protect themselves from deceitful minors by: Not entering into contracts with them Making a parent co-sign on the contract (forces the parent to take responsibility if minor backs out)

5 MINORS (cont’d) Minor- person who has yet to reach the age of adulthood Adulthood is 18 in most states Interesting note- law considers people to reach a particular age at the beginning of the day before their birthday. One second after the clock hits midnight the day before your birthday, that entire day has counted and you are now your new age. Example- You will turn 18 on April 5 th. When the clock hits midnight and one second on April 4 th, you are legally considered 18. Emancipated minor- no longer under the legal control of his or her parents Responsible for their own contracts Minor is automatically emancipated when he/she gets married or sets up their own household (moves out and lives on their own). Minor may seek emancipation from the court’s by suing for emancipation.

6 INTOXICATED PERSONS People who are under the influence of drugs or alcohol can sometimes get out of a contract Persons claiming intoxication must have been so impaired that they did not know what they were doing when entering the contract Decision is made by a judge or jury

7 OTHER LIMITS on CAPACITY Some states convicts have limited capacity to contract Aliens, citizens of other countries living in the U.S. may also have limited capacity In wartime, foreign-born people identified as enemy aliens may be denied certain capacities. Law makes exceptions for necessaries such as food, clothing, shelter, medical care, etc. Judge or jury to decide what is necessary.

8 RIGHTS and DUTIES of MINORS Contracts made by minors are voidable by the minor. Another term of voiding a contract by a minor is disaffirming. Disaffirm- show the intent not to live up to the contract. Intent can be shown by action or by statement Minors Rights: Returning of Goods (disaffirming a sales contract) o Minors may return goods they have purchased o Must be done within a reasonable amount of time o Reasonable amount of time decided by judge or jury o Some states a fee can be charged for damaged, dirty, torn, etc. items that are returned o Minors may even disaffirm a contract after becoming an adult

9 RIGHTS and DUTIES of MINORS Disaffirming Contracts Minors can not disaffirm parts of a contract, it is all or nothing After a contract is made, if an adult realizes the other party is a minor, the adult CAN NOT disaffirm the contract Two minors enter into a contract, either one can disaffirm the contract. Ratification of a Minor’s Contract Ratification- agreeing to go along with a contract that could have been avoided Can ratify by words or by actions Can be written or oral Minor can ratify a contract after becoming an adult Once ratified, minor loses all privileges they had as a minor Minor makes a payment that was due under a contract, after becoming an adult, that payment ratifies the contract.

10 RIGHTS and DUTIES of MINORS EXCEPTIONS Minors must pay fair value for necessaries Most states will hold minors accountable for car insurance Some states consider married minors as adults Minors CAN NOT get out of military enlistment contracts Minors as Students Students in a school may be searched if there is reason to believe laws or school rules have been broken Students may be restrained from printing certain matters in school sponsored newspapers

11 RIGHTS and DUTIES of PARENTS and GUARDIANS Parents’ Rights Under the Law Right to discipline their children Cannot abuse their children (law called parens patriae doctrine) Must provide children with necessaries If minors are forced to purchase own necessaires, parents will be liable for the contract Parent duty ends if child becomes emancipated Parents may name guardians for their children Two types 1)Guardian- act as the child’s parent 2)Property guardian- handle the child’s property (ends when the child becomes an adult)

12 LEGALITY Illegality can destroy an otherwise valid contract A court will not help any party to an illegal contract Neither party can enforce the agreement Neither party can get help from the court EXCEPTION: when the parties are not equally at fault, court may help the person who is less at fault get back any money or property. If a contract cannot be divided into separate promises or different acts, then any part of that contract with an illegality makes the entire contract void.

13 AGREEMENTS THAT BREAK STATUTES Various types of statutes 1)Civil and Criminal Statutes 2)Usury Statutes 3)Gambling Statutes 4)Sunday Statutes 5)Licensing Statutes State legislatures pass laws that make some agreements illegal because they violate one of the above statutes

14 AGREEMENTS THAT BREAK STATUTES Civil and Criminal Statues Agreements that require one party to commit a tort or a crime are illegal Torts- slander, libel and fraud Agreement made that interferes with or violates a person’s rights is illegal Usury Statutes Usury- activity that has hidden dimension of illegality Examples: Contract to buy stolen goods (if the person buying the goods does not know they are stolen) Charging more than the maximum legal interest rate (the person paying the rate does not know the rate is illegal)

15 AGREEMENTS THAT BREAK STATUTES Gambling Statutes Gambling is illegal in most states Examples of Gambling Playing cards (for money) Betting on sporting events Entering an office pool for money If you win money gambling and can not collect your winnings, the court will not help you and you may even get in trouble for violating the law. Have to be careful, some forms of gambling are legal in one state and illegal in another.

16 AGREEMENTS THAT BREAK STATUTES Sunday Statutes Sunday statutes are also called “Blue Laws” Not all states have Sunday Statutes Statute states that any agreements made on a Sunday are VOID. Offer made on any other day but Sunday, but accepted on a Sunday is VOID Offer made on a Sunday, but accepted on any other day is VALID (because contract is not created until it is accepted) If agreement is made on a Sunday BUT a date other than Sunday is place on the contract, it is VOID Many states apply these rules to legal holidays as well (ex. Christmas)

17 AGREEMENTS THAT BREAK STATUTES Licensing Statutes All states have statutes that require a license to do certain jobs. License- legal document granting someone permission from the government to do a certain job. (Ex. Doctor needs a medical license) Licenses protect people from unqualified people Agreements with unlicensed people in a job requiring a license is illegal

18 AGREEMENTS CONTRARY to PUBLIC POLICY Some illegal agreements break public policy, instead of statutes. Public Policy- A legal principle that holds that nobody should be allowed to do something that harms the public. Public Policy allows the courts to protect the public welfare when other laws do not. Examples of Public Policy are: Agreements that unreasonably restrain trade Agreements not to compete Agreements for price fixing Agreements to defeat competitive bidding Agreements to obstruct justice Agreements inducing breach of duty or fraud Agreements to give up the right to litigate or arbitrate Agreements interfering with marriage

19 AGREEMENTS CONTRARY to PUBLIC POLICY Agreements that Unreasonably Restrain Trade Law protects the right to make a living Contract cannot take away this right Restraint of trade agreements take away someone’s ability to do business with others. Three types of agreements that circumvent the rule Agreement not to compete Agreement for price fixing Agreement to defeat competitive bidding 1)Agreement not to compete  When a person buys a buys a business, a restrictive covenant can be added to a contract  Means the seller cannot open a business that competes with the business they just sold for a specific amount of time (courts will uphold this agreement)  If the restraint is unreasonable, contract is illegal  Promises not to compete are also found in employment contracts  Employees agree not to work for a competitor for a certain amount of time.  This is only enforceable for a reasonable amount of time.

20 AGREEMENTS CONTRARY to PUBLIC POLICY 2) Agreements for Price Fixing Laws have been created to protect competition Price fixing- competitors agree to set prices within certain ranges Price fixing hurts competition and keeps prices artificially high Price fixing can lead to being prosecuted by federal agencies 3) Agreements to defeat competitive bidding Laws often require governments to construct public works or buy goods and services through competitive bidding Competitors submit bids for a project, the lowest qualified bid wins the contract Competitors agree not to bid below a certain price, they are not bidding competitively, which makes the agreement not enforceable.

21 AGREEMENTS CONTRARY to PUBLIC POLICY Agreements to Obstruct Justice Contracts that get in the way of delivering justice is illegal Examples include Protecting someone from arrest (hiding them in your house, driving them out of town, etc.) Encouraging lawsuits Giving false testimony Bribing a juror Agreements Inducing Breach of Duty or Fraud Many people hold positions of trust and/or have a responsibility for the well-being of others (Congressmen, Senator, Public Official, etc.) Duty is to work for the best interest of the public Contracts that try to influence these people (bribes) for private gain is unenforceable

22 AGREEMENTS CONTRARY to PUBLIC POLICY Agreements to Give Up the Right to Litigate or Arbitrate Contracts MAY include clauses that limit the ability to bring a lawsuit or to arbitrate If the clause is not fair, a court may decide it is illegal. Agreements Interfering with Marriage Contracts that discourage, damage, or destroy good family relationships are illegal. Example: A contract from a father that promises to give his daughter $100,000 to never get married is void and not enforceable.

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