Presentation on theme: "Contracts: Capacity, Legality, and Enforceability"— Presentation transcript:
1 Contracts: Capacity, Legality, and Enforceability Chapter 8
2 Contractual CapacityThe minimum mental capacity required by law for a party who enters into a contractual agreement to be bound by it.Common law recognizes three classes of persons who are generally not considered to have sufficient capacity to be bound by their contracts.
3 Contractual Capacity Minors under the age of eighteen (18) contract is voidable at option of minor (must disaffirm)minor is required to return consideration (what’s left of it)cosignor or guarantor is liable on contract
4 Contracts With Minors Parents’ Liability As a general rule, parents are not liable for the contracts made by their minor children.Unless parent co-signed the obligation
5 Contracts With MinorsMinor may disaffirm and avoid obligation under the contract:Anytime up until a reasonable time after reaching majorityMinor may ratify contract upon reaching majority
6 Contractual Capacity Mentally Impaired or Incompetent Persons Voidable if contract is made while party is mentally incompetent.Obligation to return consideration upon avoidance/disaffirmation.May be ratified after becoming competent
7 Contractual Capacity Intoxicated Persons Voidable if contract is made while party is intoxicated.No difference if voluntary or involuntary.May be ratified after becoming sober.
8 Legality-Illegal Contracts Contracts Contrary to StatuteStatutes sometimes proscribe certain types of contracts, contract terms, and/or contractual provisions.
9 Illegal Contracts Usury Statutes Virtually every state has a statute that sets the maximum rate of interest that can legally be charged for different types of transactions, including ordinary loans.
10 Illegal Contracts Gambling - three elements: Consideration Chance Prize
11 Illegal Contracts Blue Laws Some states and localities prohibit engaging in certain business activities on Sundays.
12 Illegal Contracts Licensing Statutes All states require that members of certain professions -- attorneys, doctors, and architects, etc. -- be licensed by the state.Contract with unlicensed person may be unenforceable.
13 Illegal Contracts Licensing Statutes Some statutes are regulatory in natureContract with unlicensed person may be unenforceable.Some statutes just produce revenueContract with unlicensed person not affected.
14 Illegal Contracts Contracts in Restraint of Trade Restrictive covenants are generally permitted when they are ancillary to an otherwise enforceable contract for the sale of a business or for employment.
15 Illegal Contracts Unconscionable Contracts Contracts that require one party, as a consequence of disproportionate bargaining power, to accept terms that are unfairly burdensome to that party and unfairly beneficial to the party with greater bargaining power.
16 Illegal ContractsProcedural Unconscionabiltiy – Lack of voluntariness due to disparity in bargaining power.(Contracts of Adhesion)Substantive Unconscionability- focus on contracts or provisions that are overly harsh.
17 Effect of IllegalityGenerally the contract is void (not voidable), due to the “in pari delicto rule.”Exceptions (see p. 237):-One party is relatively innocent, then that party may recover benefits.-Withdrawal prior to the illegal act.-Severable or divisible contracts (i.e. overly broad covenant not to compete).
18 Genuineness of AssentA party who demonstrates that he or she did not genuinely assent to the terms of a contract may avoid the contract.Genuine assent may be lacking due to mistake, fraudulent misrepresentation, undue influence, or duress.
19 Mistake Unilateral Mistake A mistake made by one of the contracting parties.Generally, a unilateral mistake will not excuse performance of the contract unless other party knew of the mistake OR substantial mathematical error (Example 8.8 p. 238).
20 Mistake Mutual Mistake A mistake on the part of both contracting parties.In this case, either party may rescind.
21 FraudWhen an innocent party consents to a contract with fraudulent terms, he or she may usually avoid the contract, because he or she did not genuinely assent to the fraudulent terms.
22 Fraud Elements: misrepresentation of material fact made with the intent to deceive (scienter)justifiable reliancedamages
23 Undue Influence and Duress Undue Influence -- arises from relationships in which one party can influence another party to the point of overcoming the influenced party’s free will.Duress -- forcing a party to enter into a contract because of the fear created by threats.
24 The Statute of FraudsA statute which requires certain types of contracts to be in writing in order to be enforceable.Some contracts considered important enough that their terms must be memorialized in writing to ensure reliable evidence of their existence and their terms
25 The Statute of FraudsAgreements in consideration of marriage-Prenuptial agreementsNot performable within one yearInvolving an interest in landFor sale of goods over $500 ($5,000 under UCC)Collateral agreements
26 The Statute of Frauds: Exceptions AdmissionsPartial PerformanceCustom Orders of GoodsAcceptance of Delivery
27 The Statute of Frauds: Sufficiency of the Writing A writing signed by the party against whom enforcement is sought.A confirmation, invoice, sales slip, check, or fax, or any combination thereof.Several documents which, in combination, provide the terms for an agreement.
28 Contracts: Capacity, Legality, and Enforceability End of Chapter 8