2 5.1 CAPACITY and LEGALITYCapacity- Legal ability to enter into a contractAssumption 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 contractThe law states several types of people may have the right to get out of a contractMinorsPeople with mental impairmentsPeople 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 impairedIf 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 contractsConsidered by law to be:Too inexperiencedImmatureUnknowledgeableNaïveAdults can protect themselves from deceitful minors by:Not entering into contracts with themMaking 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 adulthoodAdulthood is 18 in most statesInteresting 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 5th. When the clock hits midnight and one second on April 4th, you are legally considered 18.Emancipated minor- no longer under the legal control of his or her parentsResponsible for their own contractsMinor 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 PERSONSPeople who are under the influence of drugs or alcohol can sometimes get out of a contractPersons claiming intoxication must have been so impaired that they did not know what they were doing when entering the contractDecision is made by a judge or jury
7 OTHER LIMITS on CAPACITY Some states convicts have limited capacity to contractAliens, citizens of other countries living in the U.S. may also have limited capacityIn 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 statementMinors Rights:Returning of Goods (disaffirming a sales contract)Minors may return goods they have purchasedMust be done within a reasonable amount of timeReasonable amount of time decided by judge or jurySome states a fee can be charged for damaged, dirty, torn, etc. items that are returnedMinors may even disaffirm a contract after becoming an adult
9 RIGHTS and DUTIES of MINORS Disaffirming ContractsMinors can not disaffirm parts of a contract, it is all or nothingAfter a contract is made, if an adult realizes the other party is a minor, the adult CAN NOT disaffirm the contractTwo minors enter into a contract, either one can disaffirm the contract.Ratification of a Minor’s ContractRatification- agreeing to go along with a contract that could have been avoidedCan ratify by words or by actionsCan be written or oralMinor can ratify a contract after becoming an adultOnce ratified, minor loses all privileges they had as a minorMinor makes a payment that was due under a contract, after becoming an adult, that payment ratifies the contract.
10 RIGHTS and DUTIES of MINORS EXCEPTIONSMinors must pay fair value for necessariesMost states will hold minors accountable for car insuranceSome states consider married minors as adultsMinors CAN NOT get out of military enlistment contractsMinors as StudentsStudents in a school may be searched if there is reason to believe laws or school rules have been brokenStudents may be restrained from printing certain matters in school sponsored newspapers
11 RIGHTS and DUTIES of PARENTS and GUARDIANS Parents’ Rights Under the LawRight to discipline their childrenCannot abuse their children (law called parens patriae doctrine)Must provide children with necessariesIf minors are forced to purchase own necessaires, parents will be liable for the contractParent duty ends if child becomes emancipatedParents may name guardians for their childrenTwo typesGuardian- act as the child’s parentProperty 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 contractNeither party can enforce the agreementNeither party can get help from the courtEXCEPTION: 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 statutesCivil and Criminal StatutesUsury StatutesGambling StatutesSunday StatutesLicensing StatutesState legislatures pass laws that make some agreements illegal because they violate one of the above statutes
14 AGREEMENTS THAT BREAK STATUTES Civil and Criminal StatuesAgreements that require one party to commit a tort or a crime are illegalTorts- slander, libel and fraudAgreement made that interferes with or violates a person’s rights is illegalUsury StatutesUsury- activity that has hidden dimension of illegalityExamples: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 StatutesGambling is illegal in most statesExamples of GamblingPlaying cards (for money)Betting on sporting eventsEntering an office pool for moneyIf 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 StatutesSunday statutes are also called “Blue Laws”Not all states have Sunday StatutesStatute states that any agreements made on a Sunday are VOID.Offer made on any other day but Sunday, but accepted on a Sunday is VOIDOffer 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 VOIDMany states apply these rules to legal holidays as well (ex. Christmas)
17 AGREEMENTS THAT BREAK STATUTES Licensing StatutesAll 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 peopleAgreements 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 tradeAgreements not to competeAgreements for price fixingAgreements to defeat competitive biddingAgreements to obstruct justiceAgreements inducing breach of duty or fraudAgreements to give up the right to litigate or arbitrateAgreements interfering with marriage
19 AGREEMENTS CONTRARY to PUBLIC POLICY Agreements that Unreasonably Restrain TradeLaw protects the right to make a livingContract cannot take away this rightRestraint of trade agreements take away someone’s ability to do business with others.Three types of agreements that circumvent the ruleAgreement not to competeAgreement for price fixingAgreement to defeat competitive biddingWhen a person buys a buys a business, a restrictive covenant can be added to a contractMeans 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 illegalPromises not to compete are also found in employment contractsEmployees 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 FixingLaws have been created to protect competitionPrice fixing- competitors agree to set prices within certain rangesPrice fixing hurts competition and keeps prices artificially highPrice fixing can lead to being prosecuted by federal agencies3) Agreements to defeat competitive biddingLaws often require governments to construct public works or buy goods and services through competitive biddingCompetitors submit bids for a project, the lowest qualified bid wins the contractCompetitors 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 JusticeContracts that get in the way of delivering justice is illegalExamples includeProtecting someone from arrest (hiding them in your house, driving them out of town, etc.)Encouraging lawsuitsGiving false testimonyBribing a jurorAgreements Inducing Breach of Duty or FraudMany 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 publicContracts 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 ArbitrateContracts MAY include clauses that limit the ability to bring a lawsuit or to arbitrateIf the clause is not fair, a court may decide it is illegal.Agreements Interfering with MarriageContracts 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.