1. 12 - 1 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Chapter 12 Capacity and Legality Chapter 12 Capacity and Legality

2. 12 - 2 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Capacity The law presumes that the parties to a contract have the requisite contractual capacity to enter into the contract. Certain persons do not have this capacity: –Minors –Insane persons –Intoxicated persons

3. 12 - 3 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Capacity (continued) The common law of contracts and many state statutes protect persons who lack contractual capacity from having contracts forced on them. The person asserting incapacity bears the burden of proof.

4. 12 - 4 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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. –The most prevalent age of majority is 18 years of age for both males and females.

5. 12 - 5 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Minors (continued) Any age below the statutory age of majority is called the period of minority. Thus, a minor is: –A person who has not reached the age of majority.

6. 12 - 6 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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

7. 12 - 7 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman The Infancy Doctrine A doctrine that allows minors to disaffirm (or cancel) most contracts they have entered into with adults. Doctrine based on public policy that reasons that minors should be protected from unscrupulous behavior of adults.

8. 12 - 8 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman The Infancy Doctrine (continued) Disaffirmance – the act of a minor to rescind a contract under the infancy doctrine. –Disaffirmance may be done orally, in writing, or by the minor’s conduct. Competent Party’s Duty of Restitution – if the minor has transferred consideration to the competent party before disaffirming the contract, that party must place the minor in status quo.

9. 12 - 9 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman The Infancy Doctrine (continued) Minor’s Duty of Restoration – a minor is obligated only to return the goods or property he or she has received from the adult in the condition it is in at the time of disaffirmance.

10. 12 - 10 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman The Infancy Doctrine (continued) Minor’s Duty of Restitution – most states provide that the minor must put the adult in status quo upon disaffirmance of the contract if the minor’s intentional or grossly negligent conduct caused the loss of value to the adult’s property.

11. 12 - 11 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman The Infancy Doctrine (continued) Misrepresentation of Age –Minors who misrepresent their age must place the adult in status quo if they disaffirm the contract. –A minor who has misrepresented his or her age when entering into a contract owes the duties of restoration and restitution when disaffirming it.

12. 12 - 12 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Ratification If a minor does not disaffirm a contract either during the period of minority or within a reasonable time after reaching the age of majority: –The contract is considered ratified (accepted). –The minor (now an adult) is bound by the contract. –The right to disaffirm the contract has been lost.

13. 12 - 13 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Necessaries of Life Minors are obligated to pay for the necessaries of life: –Food, Shelter, Clothing, Medical Services The seller’s recovery is based on the equitable doctrine of quasi-contract rather than on the contract itself. –The minor is obligated only to pay the reasonable value of the goods or services.

14. 12 - 14 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Parent’s Liability for Their Children’s Contracts Parents owe a legal duty to provide food, clothing, shelter, and other necessaries of life for their minor children. Parents are liable for their children’s contracts for necessaries of life if they have not adequately provided such items. The parental duty of support terminates if a minor becomes emancipated.

15. 12 - 15 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Mentally Incompetent Persons The law protects people suffering from substantial mental incapacity from enforcement of contracts against them. To be relieved of his or her duties under a contract, the law requires a person to have been legally insane at the time of entering into the contract.

16. 12 - 16 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Mentally Incompetent Persons (continued) Legal Insanity – a state of contractual incapacity as determined by law. The law has developed two standards concerning contracts of mentally incompetent persons: 1. Adjudged Insane 2. Insane, But Not Adjudged Insane

17. 12 - 17 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

18. 12 - 18 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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.

19. 12 - 19 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Intoxicated Person A person who is under contractual incapacity because of ingestion of alcohol or drugs to the point of incompetence. Most states provide that contracts entered into by such intoxicated persons are voidable by that person. The contract is not voidable by the other party if that party had contractual capacity.

20. 12 - 20 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Illegality One requirement to have an enforceable contract is that the object of the contract must be lawful. Contracts with an illegal object are void and therefore unenforceable. There are two key categories of illegality: – Contracts contrary to statutes – Contracts contrary to public policy

21. 12 - 21 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Contracts Contrary to Statutes Federal and state legislatures have enacted statutes that prohibit certain types of conduct. Contracts to perform an activity that is prohibited by statute are illegal contracts. Federal and state legislatures have enacted statutes that prohibit certain types of conduct. Contracts to perform an activity that is prohibited by statute are illegal contracts. Usury Laws Gambling Statutes Sabbath Laws Licensing Statutes –Regulatory Statute –Revenue- Raising Statute Usury Laws Gambling Statutes Sabbath Laws Licensing Statutes –Regulatory Statute –Revenue- Raising Statute

22. 12 - 22 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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

23. 12 - 23 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Effect of Illegality Since illegal contracts are void, the parties cannot sue for nonperformance. The court will generally refuse to enforce or rescind an illegal contract. The court will generally leave the parties where it finds them.

24. 12 - 24 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Exceptions to the General Rule Certain situations are exempt from the general rule of the effect of finding an illegal contract: 1. Innocent persons who were justifiably ignorant of the law or fact that made the contract illegal. 2. Persons who were induced to enter into an illegal contract by fraud, duress, or undue influence.

25. 12 - 25 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Exceptions to the General Rule (continued) 3. Persons who entered into an illegal contract withdrawn before the illegal act is performed. 4. Persons who were less at fault than the other party for entering into the illegal contract.

26. 12 - 26 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Using a Covenant Not to Compete with a Sale of a Business Covenants not to compete that are ancillary to a legitimate sale of a business or employment contract are lawful if they are reasonable in three aspects: 1. The line of business protected. 2. The geographical area protected. 3. The duration of the restriction.

27. 12 - 27 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Doctrine of Unconscionability Some lawful contracts are so oppressive or manifestly unfair that they are unjust. To prevent the enforcement of such contracts, the courts have developed the equitable doctrine of unconscionability. A contract found to be unconscionable under this doctrine is called an unconscionable contract, or a contract of adhesion.

28. 12 - 28 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Doctrine of Unconscionability (continued) Elements that must be shown to prove that a contract or clause is unconscionable: The parties possessed severely unequal bargaining power. The dominant party unreasonably used its unequal bargaining power. The adhering party had no reasonable alternative.