Capacity and Legality

BA 18
CHAPTER 11
CONTRACT
LAW

RE
IE
RT

QU
PA

IR
EM
L
AL

EN
OF

TS
ES

AN
CONTRACT
TI

D
LI

EN
(Written
BI

FO
Verbal
SI

RC
ON

Implied

EM
SP

Assumed)
RE

EN
T
© 2000. West Legal Studies.
RISK
Chapter 12 2
CONTRACT
LAW

RE
IE
RT

QU
PA

IR
L

EM
AL

EN
OF

TS
ES

AN
CONTRACT
TI

D
LI

(Written

EN
BI
SI

Verbal

FO
ON

RC
Implied
SP

EM
Assumed)
RE

EN
T
© 2000. West Legal Studies. RISK Chapter 12 3
Review of Contracts
Quick Classifications of Contracts: Give
Quiz an example of each

Bilateral
Bilateral and
and Formal
Formal and
and
Unilateral
Unilateral Informal
Informal
CO
NT
RA
Express
Express and
and CT Executed
Executed and
and
Implied
Implied Executory
Executory
S

Quasi- Voidable,
Voidable,
Quasi- Unenforceable,
Unenforceable,
contracts
contracts Valid,
© 2000. West Legal Studies.
Chapter 12 Valid, Void
Void 5
 Termination of an Offer

 Termination
Termination
by
by Acts
Acts of
of the
the
Parties
Parties

Revocation
Revocation Rejection
Rejection by
by Counteroffer
Counteroffer
by
by Offeror
Offeror Offeree
Offeree by
by Offeree
Offeree

© 2000. West Legal Studies.

Chapter 12 6
 Chap. 9

Termination of an Offer
Destruction
Destruction Lapse
of
of Subject
Subject Lapse
Matter of
of Time
Time
Matter


 Termination
Termination
by
by Operation
Operation
of
of the
the Law
Law

Death
Death or
or Supervening
Incompetency
Incompetency Illegality
© 2000. West Legal Studies.
Chapter 12 7
Legal Capacity and other Issues
 LEGAL CAPACITY
 For a contract to be considered valid and
enforceable, the parties must have the legal
ability to bind themselves to the agreement.
 Incapacity is the exception, not the rule.
 Burden of proof regarding incapacity falls
on the party raising it as a defense to
enforce the contract or as basis for
rescission of the contract.

© 2000. West Legal Studies.

Chapter 12 9
 LEGAL CAPACITY
 Law determines contractual capacity by looking at
the relative bargain power of the parties.
 Issues of contractual capacity can arise if contract
involves minors, persons lacking mental capacity,
aliens, convicts, and in some states-married
women.
 Contracts made by these people may be absolutely
void, voidable (the insane), or valid (if lucid when
contract was formed).

© 2000. West Legal Studies.

Chapter 12 10
 MINORS
 Most states no longer use common law but instead
use statutory law.
 Common Law: anyone under the age of
21.
 Statutory Law: in most states those under

the age of 18.

 Some states allow for termination of infancy status
upon marriage or emancipation.
 Emancipation: free from the control or
power of another.

© 2000. West Legal Studies.

Chapter 12 11
MINORS
 Disaffirmance/Recission
 To protect minors in dealing with adults, the law
allows minors to disaffirm (avoid) their contract.
 Except in certain specialized cases.

 Necessaries.
 Disaffirms contract, action results in a voidable
contract.
 The right to disaffirm is

absolute and personal

to the minor.

© 2000. West Legal Studies.

Chapter 12 12
 MINORS
 Disaffirmance must be in total to be effective.
 Minor can disaffirm either expressly (verbal or

written) or implied by course of conduct.

 For disaffirmance to be effective, minor must

objectively manifest intent not to be bound by

the contract.
 Duty of Restoration: the minor must return to

the adult the property or other consideration

that was the object of the contract.

© 2000. West Legal Studies.

Chapter 12 13
 MINORS
 Rescission: ability to have the contract set aside.
 Parent or other adult co-sign the
contract.
 Misrepresentation of Age.
 Minor intentionally misrepresents age.
 The contract can be voided anytime during age of

minority or a reasonable time upon reaching the

age of majority.
 Power of disaffirmance, whether contract is

executory or executed.

© 2000. West Legal Studies.

Chapter 12 14
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.

© 2000. West Legal Studies.

Chapter 12 15
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.

© 2000. West Legal Studies.

Chapter 12 16
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.

© 2000. West Legal Studies.

Chapter 12 17
 Mental Capacity

© 2000. West Legal Studies.

Chapter 12 18
 INSANE PERSONS
 Lack the capacity to make a binding
contract.
 Person must be so mentally infirm or
deranged.
 Lunacy, mental retardation, senility, alcohol
or drug abuse are irrelevant.

© 2000. West Legal Studies.

Chapter 12 19
INSANE  Effects of Transactions by Insane Persons.
 Guardian has the legal capacity to

PERSONS contract.
 To disaffirm a contract, person must

prove insanity at the time of contracting.

 
 To determine if transaction is void,

voidable or enforceable depends on facts.

 Contract is absolutely void if court

judges insanity.
 Insane person regains sanity the

person may ratify contract made

during period of insanity.

                              
                                
,
Wednesday Aug. 8, 2001. Yates is accused of
drowning her five children. Parnham pleaded
Yates not guilty by reason of insanity.
© 2000. West Legal Studies.
               
                Chapter 12 20
 INSANE PERSONS
 Necessaries.
 Law makes insane persons liable for

necessaries in quasi contract.

 Fewer controversies arise regarding

whether medical or legal services are

necessaries.

© 2000. West Legal Studies.

Chapter 12 21
 INTOXICATED PERSONS
 Validity of a contract
depends on the degree of
intoxication.
 If intoxication limits
mental capacity of
the individual, contract is
voidable at the
option of the intoxicated
person. If mental
capacity is not affected,
contract is valid and
enforceable.

© 2000. West Legal Studies.

Chapter 12 22
 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.
© 2000. West Legal Studies.
Chapter 12 23
Contracts Contrary to Statues
STATUTE OF FRAUDS
 Types of Contracts covered under the statute:
 Contracts answering for the debts of others if person defaults.

 Contracts for interests in land.

 Contracts not to be performed within one year of their making.

 Promises of executors and administrators of estates.

 Contracts made in consideration of marriage.

 Contracts for sale of goods priced at $500 or more or the lease

of goods for $1,000 or more.

© 2000. West Legal Studies.

Chapter 12 25
 MALA IN SE AND MALA
PROHIBITA BARGAINS
 Court distinguish between mala in se and
mala prohibita.
 Mala in se: bargains that violate statutes

because they are evil in themselves.

 Mala prohibita: bargains that have been

merely forbidden by statute.

© 2000. West Legal Studies.

Chapter 12 26
 Bill’s parents decided to
sell Bill’s car because it
was taking up too much
room in the garage. His Car Theft?
parents sold the car for
$5500.00. When Bill
returned home from
college, his car had been
sold. Bill had clear title
of the car, however, his
parents had access to the
pink slip. (Family dog not included..)

© 2000. West Legal Studies.

Chapter 12 27
 Was the sale between Bill’s
parents and the buyer
legal? Was this a theft?
 Was the car sold under Car Theft?
fraudulent terms?
 If Bill decided that he
wanted his car back, could
the contract/sale be voided?
 If he didn’t want the car
back, who should receive
the money from the sale?

© 2000. West Legal Studies.

Chapter 12 28
 AGREEMENTS VIOLATIVE
OF STATUTES
 Usury Statutes: loaning money at a greater
profit (or interest rate) than the law permits.
(This covers all loaning institutes such as
banks, credit unions, etc.) For usury to
exist, there must be a loan of money for
which the debtor agrees to repay the
principal at a rate that exceeds the legal rate
of interest.

© 2000. West Legal Studies.

Chapter 12 29
 AGREEMENTS VIOLATIVE
OF STATUTES
 Price-Fixing Agreements: generally to
restrain competition so as to create a
monopoly or oligopoly in order to control
price fluctuations.
 Performance of Services Without a License:
absence of license bargain is
unenforceable. License is to protect public
from unqualified persons.

© 2000. West Legal Studies.

Chapter 12 30
 Performance of Services Without
a License
Note: Some states require licensing primarily
as a revenue-producing mechanism rather
than as a device for protecting the health
and welfare of its citizens. If the primary
intent of the license requirement is to
produce revenue, the lack of a license will
not affect the contract between parties.

© 2000. West Legal Studies.

Chapter 12 31
AGREEMENTS VIOLATIVE OF
PUBLIC POLICY
 Covenant Not to Compete: also called
restrictive covenants, express promises that a
seller of a business or an employee who leaves
a company will not engage in the same or
similar business or occupation for a period of
time in a certain geographic area. Such
bargains may or may not be legal.

© 2000. West Legal Studies.

Chapter 12 32
© 2000. West Legal Studies.
Chapter 12 33
 “But the more significant ruling came when the noncompete clause
itself was considered. The California legal code promotes
employment mobility by stating, "Except as provided in this
chapter, every contract by which anyone is restrained from
engaging in a lawful profession, trade, or business of any kind is to
that extent void." The exceptions focus largely on the actions of
principals when corporations or partnerships are dissolved.

 State courts had largely interpreted this outlawing any agreement

that placed any constraint on employment. But the US court system
(the Ninth Circuit includes California) had read this statute to be in
line with the laws prevailing in other states, interpreting "restrain"
to mean "prohibit." Thus, according to the Ninth Circuit, only
agreements that blocked all employment in a field were invalid.”


© 2000. West Legal Studies.

34
“This was the California Supreme Court's chance to clarify the
situation, and the Justices took the opportunity to issue a
definitive ruling. "The agreement restricted Edwards from
performing work," they wrote in determining, "the
noncompetition agreement that Edwards was required to sign
before therefore invalid because it restrained his ability to
practice his profession." commencing employment with
Andersen was therefore invalid because it restrained his ability to
practice his profession."

The decision doesn't apply to other states but, given that the state
Supreme Court is expected to be the ultimate authority on state
law, it's likely that future Ninth Circuit rulings will follow this
ruling.”
© 2000. West Legal Studies.
35
 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.

© 2000. West Legal Studies.

Chapter 12 36
 Rewriting Restrictive Covenants:
Compete clauses are illegal if:
- The sole purpose is used to curtail competition
- Places an undue restraint on trade.
- Violates antitrust laws.
- Contains unreasonable restrictions
Courts have the right to “Blue-Pencil” or “rewrite” the
contract to make the covenant fair and legal to both
parties.

© 2000. West Legal Studies.

Chapter 12 37
 AGREEMENTS VIOLATIVE
OF PUBLIC POLICY
 Exculpatory Clauses: Avoiding
liability by excusing one’s self from
another's actions.

© 2000. West Legal Studies.

Chapter 12 38
Exculpatory
Clauses:
Businesses often use
exculpatory clauses as a
way to avoid primary
responsibility.
As an example:
“This garage is not responsible for stolen
or missing items. Please lock your car
and take all your valuables with you.”

© 2000. West Legal Studies.

Chapter 12 39
© 2000. West Legal Studies.
Chapter 12 40
EXCEPTIONS: UPHOLDING
ILLEGAL AGREEMENTS
 Parties Not in Pari Delicto: Parties not
equally at fault.
 Repentance: parties try and undo or rescind
illegal agreement before the legal
completion.
 Partial Illegality: unenforceable parts of the
bargain that are illegal.

© 2000. West Legal Studies.

Chapter 12 41
Question Chap. 12
for
Thought Valid, Voidable, or Void?
A
A minor
minor who
who makes
makes aa contract
contract and
and does
does not
not
disaffirm
disaffirm itit before
before her
her 18th
18th birthday.
birthday.

A
A mentally
mentally ill
ill person
person who
who has
has not
not been
been judicially
judicially
declared
declared insane.
insane.

 An
An intoxicated
intoxicated person
person who
who contracts
contracts to
to charge
charge aa
client
client with
with aa usurious
usurious loan
loan rate.
rate.
© 2000. West Legal Studies.
Chapter 12 42
Question Chap. 12
for
Thought Valid, Voidable, or Void?
A
A minor
minor who
who makes
makes aa contract
contract and
and does
does not
not
disaffirm
disaffirm itit before
before her
her 18th
18th birthday.
birthday.
Valid
Valid
AA mentally
mentally illill person
person who
who has
has not
not been
been judicially
judicially
declared
declared insane.
insane.
Voidable
Voidable
 An
An intoxicated
intoxicated person
person who
who contracts
contracts to
to charge
charge aa
client
client with
with aa usurious
usurious loan
loan rate.
rate.
Void
Void
© 2000. West Legal Studies.
Chapter 12 43
 Questions for Review:

1. What is meant by legal Capacity?

2. What is the span of the age range that
minors are protected via common law?
3. What is a Duty of Restoration?
4. What are three stipulations that can render
a contract void?

© 2000. West Legal Studies.

Chapter 12 44
 Questions for Review:

5. What does disaffirm mean?

6. What does Ratification mean?
7. If a minor makes a contract and does not
disaffirm it before her 18th birthday, the
contract is ___________.

© 2000. West Legal Studies.

Chapter 12 45
 THE REQUIREMENT OF
REALITY OF CONSENT
 Law has to ascertain whether consent given
by parties is real or whether the facts differ
from those to which the parties have agreed.
 Law requires reality of consent as a
prerequisite to form a contract.

© 2000. West Legal Studies.

Chapter 12 46
 UNCONSCIONABILITY
 May signal a lack of meaningful assent to a
contract.
 May justify a court’s subsequent
intervention on behalf of the injured party.

© 2000. West Legal Studies.

Chapter 12 47
 http://www.snopes.com/business/deals/pepsijet.asp
http://www.youtube.com/watch?v=ZdackF2H7Qc

© 2000. West Legal Studies.

Chapter 12 48
 Websites to View:

 Legal Information Institute (LII), Contract Law
Materials

http://wwwsecure.law.cornell.edu/topics/contr
acts.html
 The American Law Institute (ALI)
http://www.ali.org


© 2000. West Legal Studies.

Chapter 12 49
 ON-LINE RESOURCES
 Sherman Antitrust Act
 Clayton Act
 Federal Trade Commission Act

© 2000. West Legal Studies.

Chapter 12 50