© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 Contracts: Capacity, Legality, Assent, and Form Chapter 9 BUSINESS LAW TODAY Essentials 9 th Ed. Roger LeRoy Miller - Institute for University Studies, Arlington, Texas Gaylord A. Jentz - University of Texas at Austin, Emeritus

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 Learning Objectives Does a minor have the capacity to enter into an enforceable contract? What does it mean to disaffirm a contract? Does a minor have the capacity to enter into an enforceable contract? What does it mean to disaffirm a contract? What is an exculpatory clause? In what circumstances might exculpatory clauses be enforced? When will they not be enforced? What is an exculpatory clause? In what circumstances might exculpatory clauses be enforced? When will they not be enforced? In what types of situations might voluntary consent to a contracts terms be lacking? In what types of situations might voluntary consent to a contracts terms be lacking? What are the elements of fraudulent misrepresentation? What are the elements of fraudulent misrepresentation? What contracts must be in writing to be enforceable? What contracts must be in writing to be enforceable?

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 Contractual Capacity The legal ability to enter into a contractual relationship. The legal ability to enter into a contractual relationship. Full competence. Full competence. No competence. No competence. Limited competence. Limited competence.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 In most states, a person is no longer a minor for contractual purposes at the age of 18. In most states, a person is no longer a minor for contractual purposes at the age of 18. A minor can enter into any contract that an adult can. A minor can enter into any contract that an adult can. A contract entered into by a minor is voidable at the option of that minor. A contract entered into by a minor is voidable at the option of that minor. Minors

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 A contract can be disaffirmed at any time during minority or for a reasonable period after the minor comes of age. A contract can be disaffirmed at any time during minority or for a reasonable period after the minor comes of age. Minor must disaffirm the entire contract. Minor must disaffirm the entire contract. Disaffirmance can be expressed or implied. Disaffirmance can be expressed or implied. Disaffirmance

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 In most states, minor need only return the goods (or other consideration) subject to the contract, provided the goods are in the minors possession or control. In most states, minor need only return the goods (or other consideration) subject to the contract, provided the goods are in the minors possession or control. In increasing number of states, the minor must restore the adult to the position held before the contract was made. In increasing number of states, the minor must restore the adult to the position held before the contract was made. Minors Obligation on Disaffirmance

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 Misrepresentation of Age. Misrepresentation of Age. Generally, minor can disaffirm the contract. Generally, minor can disaffirm the contract. But growing number of states prohibit disaffirmance and hold the minor liable. But growing number of states prohibit disaffirmance and hold the minor liable. Contracts for Necessaries. Contracts for Necessaries. Contracts for food, clothing, shelter may be disaffirmed by minor, who remains liable for the reasonable value of goods or services. Contracts for food, clothing, shelter may be disaffirmed by minor, who remains liable for the reasonable value of goods or services. Exceptions to Minors Right to Disaffirm

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 Insurance. Insurance. Not viewed as necessaries, so minor can disaffirm contract and recover all premiums paid. Not viewed as necessaries, so minor can disaffirm contract and recover all premiums paid. Loans. Loans. Seldom considered to be necessaries. Seldom considered to be necessaries. Exception: Exception: Loan to a minor for the express purpose of enabling the minor to purchase necessaries.Loan to a minor for the express purpose of enabling the minor to purchase necessaries. Exceptions to Minors Right to Disaffirm

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 Ratification Occurs when a minor, on or after reaching majority, indicates (expressly or impliedly) an intention to become bound by a contract made as a minor. Occurs when a minor, on or after reaching majority, indicates (expressly or impliedly) an intention to become bound by a contract made as a minor. Executed v. Executory contracts. Executed v. Executory contracts.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 Contracts. Contracts. Parents not liable (This is why parents are usually required to sign any contract made with a minor). Parents not liable (This is why parents are usually required to sign any contract made with a minor). Torts (Statutes Vary): Torts (Statutes Vary): Minors are personally liable for their own torts. Minors are personally liable for their own torts. Liability imposed on parents only for willful acts of their minor children. Liability imposed on parents only for willful acts of their minor children. Liability imposed on parents for their children negligent acts that result from their parents negligence. Liability imposed on parents for their children negligent acts that result from their parents negligence. Parents Liability

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 Intoxicated Persons Lack of contractual capacity at the time the contract is being made. Lack of contractual capacity at the time the contract is being made. Contract can be either voidable or valid. Contract can be either voidable or valid. Courts look at objective indications to determine if contract is voidable. Courts look at objective indications to determine if contract is voidable. If voidable: If voidable: Person has the option to disaffirm, or Person has the option to disaffirm, or Person may ratify the contract expressly or impliedly. Person may ratify the contract expressly or impliedly.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12 Void. Void. If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed. If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed. Voidable. Voidable. 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. 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. Valid. Valid. If person is able to understand the nature and effect of entering into a contract yet lacks capacity to engage in other activities. If person is able to understand the nature and effect of entering into a contract yet lacks capacity to engage in other activities. Lucid Interval. Lucid Interval. Mentally Incompetent Persons

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Legality A contract to do something prohibited by federal or state statutory law is illegal and therefore void (never existed). A contract to do something prohibited by federal or state statutory law is illegal and therefore void (never existed). Contracts Contrary to Statute. Contracts Contrary to Statute. Contracts to commit a crime. Contracts to commit a crime. Usury. Usury. Gambling. Gambling. Licensing Statutes. Licensing Statutes.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14 Covenants not to Compete and the Sale of an Ongoing Business. Covenants not to Compete and the Sale of an Ongoing Business. Covenants Not to Compete in Employment Covenants Not to Compete in Employment Contracts are legal as long as the duration and geographic limits are reasonable. CASE 9.1 Comedy Club, Inc. v. Improv West Associates (2009). Covenant not to compete for 14 years covering 48 states was too broad and therefore invalid. CASE 9.1 Comedy Club, Inc. v. Improv West Associates (2009). Covenant not to compete for 14 years covering 48 states was too broad and therefore invalid. Contracts in Restraint of Trade

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15 Procedural Unconsionability: adhesion contracts. Procedural Unconsionability: adhesion contracts. Substantive Unconsionability: when terms of contract are oppressive or overly harsh. Substantive Unconsionability: when terms of contract are oppressive or overly harsh. Unconscionable Contracts

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16 Unconscionable Contracts

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17 Release a party from liability in the event of monetary or physical injury, no matter who is at fault. Courts generally view these clauses with disfavor. Release a party from liability in the event of monetary or physical injury, no matter who is at fault. Courts generally view these clauses with disfavor. Exculpatory Clauses

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18 Justifiable Ignorance of the Facts. Justifiable Ignorance of the Facts. Members of Protected Classes. Members of Protected Classes. Withdrawal from an Illegal Agreement. Withdrawal from an Illegal Agreement. Severable or Divisible Contracts. Severable or Divisible Contracts. Contract Illegal through Fraud, Duress, or Undue Influence. Contract Illegal through Fraud, Duress, or Undue Influence. Effect of Illegality

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19 Voluntary Consent: Mistakes

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20 Mistakes Mistake of Value (or Quality). Mistake of Value (or Quality). Contract is enforceable. Contract is enforceable. Unilateral Mistake (of Fact). Unilateral Mistake (of Fact). Party does not have the right to cancel contract unless: Party does not have the right to cancel contract unless: (1) the non-mistaken party knew or should have known about the mistake, or(1) the non-mistaken party knew or should have known about the mistake, or (2) there is a clerical error.(2) there is a clerical error.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21 Mistakes Bilateral (Mutual) Mistakesif both are mistaken, either one can cancel the contract. Bilateral (Mutual) Mistakesif both are mistaken, either one can cancel the contract. CASE 9.2 Inkel v. Pride Chevrolet- Pontiac, Inc. (2008). For mutual mistake to occur, both parties must have been mistaken about a material fact. This was a matter of fact for a jury. CASE 9.2 Inkel v. Pride Chevrolet- Pontiac, Inc. (2008). For mutual mistake to occur, both parties must have been mistaken about a material fact. This was a matter of fact for a jury.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22 Contract is voidable by innocent party. Injured party must show: Contract is voidable by innocent party. Injured party must show: Misrepresentation of a material fact (not opinion) by conduct, of law, silence, or words. Opinion is not fact (unless it is an expert opinion). Misrepresentation of a material fact (not opinion) by conduct, of law, silence, or words. Opinion is not fact (unless it is an expert opinion). CASE 9.3 Rosenweig v. Givens (2009). Whether fraud was committed in the context of a fiduciary relationship between the parties was a question of fact for a jury. CASE 9.3 Rosenweig v. Givens (2009). Whether fraud was committed in the context of a fiduciary relationship between the parties was a question of fact for a jury. Fraudulent Misrepresentation

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23 Injured party must show (contd): Injured party must show (contd): Intent to deceive. Also known as scienter. Intent to deceive. Also known as scienter. Innocent party must have justifiably relied on the misrepresentation. Innocent party must have justifiably relied on the misrepresentation. Plaintiff must have suffered a legal injury. Plaintiff must have suffered a legal injury. Fraudulent Misrepresentation

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24 Undue Influence & Duress Undue Influence. Undue Influence. Arises from a special relationship of trust. Arises from a special relationship of trust. A stronger party overcomes a weaker partys free will by exerting psychological influence. A stronger party overcomes a weaker partys free will by exerting psychological influence. Duress. Duress. Threat of physical force or extortion. Threat of physical force or extortion. Can serve as basis for rescission of contract. Can serve as basis for rescission of contract. Economic need, by itself, is not duress. Economic need, by itself, is not duress.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25 Form: Statute of Frauds

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26 Requires certain contracts to be in writing and signed to be enforceable, as follows: Requires certain contracts to be in writing and signed to be enforceable, as follows: Interest in Land: A contract involving an interest in land. Includes sales, fixtures, leases, mortgages, and easements. Interest in Land: A contract involving an interest in land. Includes sales, fixtures, leases, mortgages, and easements. One Year Rule: A contract that by its terms cannot be performed within 1 year of execution. One Year Rule: A contract that by its terms cannot be performed within 1 year of execution. Statute of FraudsWriting Requirement

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27 One Year Rule

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 28 Statute of Frauds Collateral Promises: answer for the debt of another. Collateral Promises: answer for the debt of another. Contracts with Primary vs. Secondary Obligations. Only secondary obligations must be in writing. Contracts with Primary vs. Secondary Obligations. Only secondary obligations must be in writing. Exception – Main Purpose Rule: guarantor seeks to secure personal benefit. Exception – Main Purpose Rule: guarantor seeks to secure personal benefit. Promises Made in Consideration of Marriage. Promises Made in Consideration of Marriage. Unilateral promise for money or property must be in writing. Unilateral promise for money or property must be in writing.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 29 Statute of Frauds Contracts for the Sale of Goods over $500 must be in writing. Contracts for the Sale of Goods over $500 must be in writing. Exceptions: Exceptions: Partial performance, detrimental reliance. Partial performance, detrimental reliance.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 30 Statute of Frauds--Exceptions Exceptions to Statute of Frauds: Exceptions to Statute of Frauds: Admissions by party against whom enforcement is sought. Admissions by party against whom enforcement is sought. Promissory Estoppel (or Detrimental Reliance). Promissory Estoppel (or Detrimental Reliance). Special UCC Exceptions. Special UCC Exceptions. Oral contracts for sale of customized goods may be enforced. Oral contracts for sale of customized goods may be enforced. Oral contracts between merchants may be enforced. Oral contracts between merchants may be enforced.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 31 What Constitutes a Writing? What Constitutes a Writing? Written contract(s) or memorandum(s) (paper or electronic) SIGNED by the party against whom enforcement is sought (typically the defendant in the case). Written contract(s) or memorandum(s) (paper or electronic) SIGNED by the party against whom enforcement is sought (typically the defendant in the case). Documents can be incorporated into each other. Documents can be incorporated into each other. What Must be Contained in the Writing? What Must be Contained in the Writing? Essential terms only. Essential terms only. Must name parties. Must name parties. Be signed by party against whom enforcement is sought (usually the Defendant). Proving an e-signature is a matter for trial. Be signed by party against whom enforcement is sought (usually the Defendant). Proving an e-signature is a matter for trial. Statute of Frauds Sufficiency of the Writing