1. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 Capacity and Legality 1 Copyright © 2016 McGraw-Hill Education. All rights reserved.

2. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 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? 2

3. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 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? 3

4. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. 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 4

5. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. 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 5

6. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Individuals Who Have Only Limited Capacity to Contract Minors Mentally Incapacitated Persons Intoxicated Persons 6

7. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. 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 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 Even if consideration damaged/destroyed, other party has no recourse against minor Rules designed to discourage competent parties from entering into contracts with minors 7

8. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Exceptions to Minor’s Right to Disaffirm Contract Contract for Necessaries (Definition): Contracts that supply minor with basic necessities of life -Examples: food, clothing, shelter, basic medical services 8

9. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Exceptions to Minor’s Right to Disaffirm Contract (Continued) 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 -Implied Ratification: Occurs when former minor takes action after reaching age of majority consistent with intent to ratify contract 9

10. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Parental Liability for Minors’ Contracts, Necessaries, and Torts General Rule: Parents not liable for contracts entered into by their minor children -Exception: Contracts for necessaries 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 10

11. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Individuals Having No Capacity to Contract Those adjudicated insane Those adjudicated habitually intoxicated Those with appointed legal guardians 11

12. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Illegal Contracts Contracts with no legal purpose and/or subject matter -Example: Agreement to commit crime/tort Contracts violating statute(s) and/or “public policy” -Example: Usurious loan agreement (loan contract exceeding state-imposed maximum interest rate) -Example: Unconscionable contract (Agreement so unfair that it is “void of conscience”) 12

13. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Procedural Versus Substantive Unconscionability Procedural Unconscionability-Relates to conditions that would impair one party’s understanding of a contract/contract terms -Example: Adhesion contract (Contract created by a party and presented to other party on a “take-it- or-leave-it” basis) Substantive Unconscionability-Involves overly harsh or lopsided substance in a contract -Example: Contract in which one party has little to no legal recourse - 13

14. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Effect of Illegal Agreement General Rule: When an agreement is illegal, the contract is void 14