Download Business Law Today, Essentials, 9th Ed.

BUSINESS LAW TODAY
Essentials 9th Ed.
Roger LeRoy Miller - Institute for University Studies, Arlington, Texas
Gaylord A. Jentz - University of Texas at Austin, Emeritus
Chapter
9
Contracts: Capacity, Legality,
Assent, and Form
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Learning Objectives
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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?
In what types of situations might voluntary
consent to a contract’s terms be lacking?
What are the elements of fraudulent
misrepresentation?
What contracts must be in writing to be
enforceable?
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Contractual Capacity
 The legal ability to enter into a
contractual relationship.
Full competence.
No competence.
Limited competence.
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Minors
 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 contract entered into by a minor is
voidable at the option of that minor.
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Disaffirmance
 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.
 Disaffirmance can be expressed or
implied.
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Minor’s Obligation on Disaffirmance
 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.
 In increasing number of states, the minor
must restore the adult to the position
held before the contract was made.
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Exceptions to Minor’s Right to Disaffirm
 Misrepresentation of Age.
Generally, minor can disaffirm the contract.
But growing number of states prohibit
disaffirmance and hold the minor liable.
 Contracts for Necessaries.
Contracts for food, clothing, shelter may be
disaffirmed by minor, who remains liable for the
reasonable value of goods or services.
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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.
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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.
 Executed v. Executory contracts.
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Parent’s Liability
 Contracts.
Parents not liable (This is why parents are
usually required to sign any contract made
with a minor).
 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.
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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.
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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.
 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.
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Legality
 A contract to do something prohibited by
federal or state statutory law is illegal
and therefore void (never existed).
 Contracts Contrary to Statute.
Contracts to commit a crime.
Usury.
Gambling.
Licensing Statutes.
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Contracts in Restraint of Trade
 Covenants not to Compete and the Sale
of an Ongoing Business.
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.
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Unconscionable Contracts
 Procedural Unconsionability: adhesion
contracts.
 Substantive Unconsionability: when
terms of contract are oppressive or
overly harsh.
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Unconscionable Contracts
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Exculpatory Clauses
 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.
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Effect of Illegality
 Justifiable Ignorance of the Facts.
 Members of Protected Classes.
 Withdrawal from an Illegal Agreement.
 Severable or Divisible Contracts.
 Contract Illegal through Fraud, Duress,
or Undue Influence.
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Voluntary Consent: Mistakes
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Mistakes
 Mistake of Value (or Quality).
Contract is enforceable.
 Unilateral Mistake (of Fact).
Party does not have the right to cancel
contract unless:
• (1) the non-mistaken party knew or should
have known about the mistake, or
• (2) there is a clerical error.
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Mistakes
 Bilateral (Mutual) Mistakes—if both are
mistaken, either one can cancel the
contract.
 CASE 9.2 Inkel v. Pride ChevroletPontiac, 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.
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Fraudulent Misrepresentation
 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).
 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.
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Fraudulent Misrepresentation
 Injured party must show (cont’d):
Intent to deceive. Also known as “scienter.”
Innocent party must have justifiably relied on
the misrepresentation.
Plaintiff must have suffered a legal injury.
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Undue Influence & Duress
 Undue Influence.
Arises from a special relationship of trust.
A stronger party overcomes a weaker party’s
free will by exerting psychological influence.
 Duress.
Threat of physical force or extortion.
Can serve as basis for rescission of contract.
Economic need, by itself, is not duress.
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Form: Statute of Frauds
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Statute of Frauds—Writing Requirement
 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.
One Year Rule: A contract that by its
terms cannot be performed within 1 year
of execution. 
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‘One Year Rule’
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Statute of Frauds
 Collateral Promises: answer for the
debt of another.
Contracts with Primary vs. Secondary
Obligations. Only secondary obligations must
be in writing.
Exception – “Main Purpose” Rule: guarantor
seeks to secure personal benefit.
 Promises Made in Consideration of
Marriage.
Unilateral promise for money or property must
be in writing.
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Statute of Frauds
 Contracts for the Sale of Goods
over $500 must be in writing.
 Exceptions:
Partial performance, detrimental reliance.
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Statute of Frauds--Exceptions
 Exceptions to Statute of Frauds:
Admissions by party against whom
enforcement is sought.
Promissory Estoppel (or Detrimental
Reliance).
 Special UCC Exceptions.
Oral contracts for sale of customized goods
may be enforced.
Oral contracts between merchants may be
enforced.
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Statute of Frauds—
Sufficiency of the 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).
 Documents can be “incorporated” into each other.
 What Must be Contained in the Writing?
 Essential terms only.
 Must name parties.
 Be signed by party against whom enforcement is sought
(usually the Defendant). Proving an “e-signature” is a
matter for trial.
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