1. © 2007 West Legal Studies in Business, A Division of Thomson Learning Chapter 9 Contracts: Capacity and Legality

2. © 2007 West Legal Studies in Business, A Division of Thomson Learning 2 What are some exceptions to the rule that a minor can disaffirm (avoid) any contract? Does an intoxicated person have the capacity to enter into an enforceable contract? Does the mental incompetence of one party necessarily make a contract void? Under what circumstances will a covenant not to compete be enforceable? When will such covenants not be enforced? What is an exculpatory clause? Under what circumstances might exculpatory clauses be enforced? When will they not be enforced? Learning Objectives

3. © 2007 West Legal Studies in Business, A Division of Thomson Learning 3 Contractual Capacity Contractual Capacity. –The legal ability to enter into a contractual relationship. Full competence. No competence. Limited competence. Legality. –The agreement must not call for the performance of any act that is criminal, tortious, or otherwise opposed to public policy.

4. © 2007 West Legal Studies in Business, A Division of Thomson Learning 4 Minors In most states, a person is no longer a minor for contractual purposes at the age 18. 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.

5. © 2007 West Legal Studies in Business, A Division of Thomson Learning 5 Voidable Contracts A Voidable contract is a Valid contract until the minor disaffirms it; then it disappears forever…

6. © 2007 West Legal Studies in Business, A Division of Thomson Learning 6 Disaffirmance A contract can be disaffirmed (cancel the contract) at any time during minority or for a reasonable period after the minor comes of age. Minor must disaffirm the entire contract. Disaffirmance can be expressed (words- written or oral) or implied (minor’s actions).

7. © 2007 West Legal Studies in Business, A Division of Thomson Learning 7 In most states, minor need only return the goods (or other consideration) subject to the contract, provided the goods are in the minor’s possession or control—even if it’s damaged. In increasing number of states, the minor must restore the adult to the position held before the contract was made—but this is the minority rule CASE 9.1 Dodson v. Shrader (1992). A Minor’s Obligations on Disaffirmance

8. © 2007 West Legal Studies in Business, A Division of Thomson Learning 8 What ?? *%#@*%& Even if the minor has used, lost, or otherwise disposed of the goods, the minor may still disaffirm No obligation to make restitution or pay for the use of the goods. Holy moly guacamole!!

9. © 2007 West Legal Studies in Business, A Division of Thomson Learning 9 Exceptions to Minor’s Right to Disaffirm Misrepresentation of Age. –Generally, minor can disaffirm the contract. –But some states prohibit disaffirmance and hold the minor liable. –Some jurisdiction may hold minor liable for tort fraud; however parents not responsible for minor’s torts Contracts for Necessaries. –Contracts for food, clothing, shelter may be disaffirmed by minor, who remains liable for the reasonable value of goods or services USED.

10. © 2007 West Legal Studies in Business, A Division of Thomson Learning 10 Necessaries Used : food, shelter, clothing, medical services, vocational school Pay reasonable value—not contract price! Rent contract price $1,000 per month; Reasonable value: $600 per month-minor only liable for $600 x 3 months (Used) = $1800. Minor only liable for necessaries Used; Six month lease minor only stayed three months; must pay reasonable value for three months Used, but not liable for remaining three months.

11. © 2007 West Legal Studies in Business, A Division of Thomson Learning 11 Exceptions to Minor’s Right to Disaffirm Insurance. – Not viewed as necessaries, so minor can disaffirm contract and recover all premiums paid. Loans. –Seldom considered to be necessaries. –Exception: Loan to a minor for the express purpose of enabling the minor to purchase necessaries.

12. © 2007 West Legal Studies in Business, A Division of Thomson Learning 12 Ratification by 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. Emancipation. –Removes lack of contractual capacity.

13. © 2007 West Legal Studies in Business, A Division of Thomson Learning 13 Contracts. –Parents not liable (This is why parents are usually required to sign any contract made with a minor-cosign then parent becomes personally liable). Torts (Statutes Vary): –Minors are personally liable for their own torts. –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. Parents’ Liability

14. © 2007 West Legal Studies in Business, A Division of Thomson Learning 14 Intoxicated Persons Lack of contractual capacity at the time the contract is being made. Contract can be either voidable or valid. –Courts look at objective indications to determine if contract is voidable. If voidable: –Person has the option to disaffirm, or –Person may ratify the contract expressly or impliedly.

15. © 2007 West Legal Studies in Business, A Division of Thomson Learning 15 Mentally Incompetent Persons Void: If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed. 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 & not adjudged mentally incompetent by a court of law. Valid: 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.

16. © 2007 West Legal Studies in Business, A Division of Thomson Learning 16 Legality A contract to do something prohibited by federal or state statutory law is illegal and therefore void (never existed). –Contract that calls for for a tortious act. –Contract that calls for an act contrary to public policy.

17. © 2007 West Legal Studies in Business, A Division of Thomson Learning 17 Insane Disaffirms If the sane person acted in good faith, and the insane person has not been adjudged insane, the insane person must restore whatever was received once the contract has been disaffirmed Minor doesn’t have to do this!!

18. © 2007 West Legal Studies in Business, A Division of Thomson Learning 18 Contracts Contrary to Statute Usury. Gambling. Sabbath Laws. Licensing Statutes. Contracts to Commit a Crime. Contracts with Unlicensed Practitioners. –CASE 9.3 RCDI Construction, Inc. v. Spaceplan/Architecture, Planning & Interiors, P.A. (2001).

19. © 2007 West Legal Studies in Business, A Division of Thomson Learning 19 Contracts Contrary to Public Policy Contracts contrary to public policy are void. Unconscionable Contracts or Clauses. Procedural or Substantive Unconscionability. Exculpatory Clauses. Discriminatory Contracts. Contracts for the Commission of a Tort.

20. © 2007 West Legal Studies in Business, A Division of Thomson Learning 20 Contracts in Restraint of Trade –Anti-Competitive Agreements are void. Exception: Covenant not to Compete and Sale of Business. Exception: Covenant not to Compete in Employment. Unconscionable Contracts/Clauses. –Exculpatory clauses. Contracts Contrary to Public Policy

21. © 2007 West Legal Studies in Business, A Division of Thomson Learning 21 Effect of Illegality Justifiable Ignorance of the Facts. Members of Protected Classes. Withdrawal from an Illegal Agreement. Contract Illegal through Fraud, Duress, or Undue Influence. Severable or Divisible Contracts.