1. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 1 CAPACITY AND LEGALITY © 2010 Pearson Education, Inc., publishing as Prentice-Hall CHAPTER 6

2. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 2 Capacity Law presumes that parties have contractual capacity to enter into the contract. Certain persons do not have this capacity: –Minors –Insane persons –Intoxicated persons

3. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 3 Capacity (continued) Common law and many state statutes protect persons who lack contractual capacity from having contracts forced on them. Person asserting incapacity bears burden of proof.

4. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 4 Minors Common law defines minors as: –Females under the age of 18; and –Males under the age of 21 Many states have enacted statutes that specify the age of majority. –Generally 18 years of age for both males and females.

5. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 5 KEY ISSUES RELATING TO MINORS AND CONTRACTS KEY ISSUES RELATING TO MINORS AND CONTRACTS The Infancy Doctrine Ratification Parents’ Liability for Their Children’s Contracts Necessaries of Life

6. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 6 Infancy Doctrine Minors may disaffirm (cancel) most contracts they have entered into with adults. –Contract is voidable by minor. –Minor has choice to enforce or disaffirm contract. Public policy of protecting minors from unscrupulous adults.

7. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 7 Infancy Doctrine (continued) Disaffirmance – minor’s act of rescinding a contract under infancy doctrine. –May be done orally, in writing, or by conduct. –Must be done within reasonable time of reaching age of majority.

8. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 8 Infancy Doctrine (continued) Parties’ Duties upon Disaffirmance –Minor must only return the goods or property received from the adult, in the condition it is in at the time of disaffirmance. –Adult has duty of restitution – If minor has transferred consideration before disaffirming the contract, adult must place minor in status quo.

9. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 9 Infancy Doctrine (continued) Minor’s Duty of Restitution – Most states provide that the minor must place adult in status quo upon disaffirmance: – If minor’s intentional or grossly negligent conduct caused the loss of value to the adult’s property. –If minor misrepresented his or her age.

10. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 10 Ratification If minor does not disaffirm during period of minority or within a reasonable time after reaching the age of majority: –Contract is ratified (accepted). –Minor (now an adult) is bound by contract. –Right to disaffirm is lost.

11. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 11 Parent’s Liability for Children’s Contracts Parents owe a legal duty to provide food, clothing, shelter, and other necessaries of life for their minor children. Parents liable for their children’s contracts for necessaries if they have not adequately provided such items. Parental duty of support terminates if a minor becomes emancipated.

12. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 12 Minor’s Liability for Necessaries Minors are obligated to pay for the necessaries of life. –Food, shelter, clothing, medical services Based on quasi-contract. –Minor must pay only reasonable value of the goods or services.

13. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 13 Minors Cannot Disaffirm Certain Contracts By state statutes Typically: –Medical care –Health and life insurance –Educational loan agreements –Contracts to support children –Contracts to enlist in military –Certain sports and entertainment contracts

14. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 14 Mentally Incompetent Persons Law protects people suffering from substantial mental incapacity from enforcement of contracts. To be relieved of duties under a contract, law requires a person to have been legally insane at the time of entering contract.

15. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 15 Mentally Incompetent Persons (continued) Legal Insanity – a state of contractual incapacity as determined by law. Two standards concerning contracts of mentally incompetent persons: Adjudged Insane Insane, But Not Adjudged Insane

16. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 16 Mentally Incompetent Persons (continued) Adjudged Insane –A person who has been adjudged insane by a proper court or administrative agency. –A contract entered into by such a person is void. –Neither party can enforce the contract.

17. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 17 Mentally Incompetent Persons (continued) Insane, But Not Adjudged Insane –A person who is insane but has not been adjudged insane by a court or administrative agency. –A contract entered into by such a person is generally voidable. –The competent party cannot void the contract.

18. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 18 Intoxicated Person A person who is so intoxicated that he or she cannot understand nature of transaction may disaffim. –Contract is voidable by intoxicated party. –Contract is not voidable by the other party if that party had contractual capacity. Intoxicated party must return other party to status quo.

19. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 19 Illegality Contracts with an illegal object are void and therefore unenforceable. Two categories of illegality: –Contracts contrary to statutes –Contracts contrary to public policy

20. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 20 Contracts Contrary to Statutes Federal and state statutes prohibit certain types of conduct. Contracts to perform an activity that is prohibited by statute are void. Federal and state statutes prohibit certain types of conduct. Contracts to perform an activity that is prohibited by statute are void. Usury Laws Contracts to commit crime Gambling Statutes Licensing Statutes –Regulatory Statute –Revenue-Raising Statute Usury Laws Contracts to commit crime Gambling Statutes Licensing Statutes –Regulatory Statute –Revenue-Raising Statute

21. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 21 Contracts Contrary to Public Policy Contracts that have a negative impact on society or that interfere with the public’s safety and welfare. Such contracts are void. Contracts that have a negative impact on society or that interfere with the public’s safety and welfare. Such contracts are void. Immoral Contracts Contracts in Restraint of Trade Exculpatory Clauses Immoral Contracts Contracts in Restraint of Trade Exculpatory Clauses

22. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 22 Effect of Illegality Parties cannot sue for nonperformance. Court will generally refuse to enforce or rescind an illegal contract. Court will generally leave the parties where it finds them.

23. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 23 Exceptions to the General Rule Court may assist: Innocent persons justifiably ignorant of the law or fact that made the contract illegal. E.g., person who bought insurance from unlicensed company. Persons induced to enter into an illegal contract by fraud, duress, or undue influence.

24. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 24 Exceptions to the General Rule (continued) Court may assist: Persons who withdraw before the illegal act performed. – E.g., person who hires another to steal trade secret, but then tells person not to do it. Persons less at fault than the other party for entering into the illegal contract.

25. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 25 Exculpatory Clauses Contractual provision relieving a party from tort liability for ordinary negligence. May be found in leases, sales contracts, service contracts, etc. If in contract that affects public interest, involves essential service, or if protected party has superior bargaining power, clause is likely void.

26. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 26 Covenants Not to Compete Lawful if ancillary to sale of a business or employment contract and if reasonable in three aspects: The line of business protected. Geographical area. Duration of the restriction.

27. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 27 Unconscionability Court may not enforce a contract that is so oppressive or manifestly unfair that it is unjust. –Called unconscionable contract, or contract of adhesion. –E.g., contract for loan with interest rate of 608%.

28. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 28 Unconscionability (continued) Elements of unconscionable contract: –The parties possessed severely unequal bargaining power. –Dominant party unreasonably used its unequal bargaining power. –Adhering party had no reasonable alternative.