Clarkson14e - PPT - ch14 Capacity and Legality

BUSINESS LAW
TEXT AND CASES

Fourteenth Edition
CLARKSON MILLER CROSS 

 

CHAPTER 14: CAPACITY

AND LEGALITY
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
§1: CONTRACTUAL CAPACITY (1 OF 25)
 Contractual Capacity: Legal ability to
enter into a contractual relationship.
A person determined by court to be
mentally incompetent cannot form a
valid contract.
In other situations, capacity may exist,
but contract is not legally binding.
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2
CONTRACTUAL CAPACITY (2 OF 25)
 Minors: The age of majority (when a
person is no longer a minor) for
contractual purposes is eighteen years in
almost all states. Some states provide for
the termination of minority on marriage.
 Emancipation occurs when a child’s parent
or legal guardian relinquishes the legal

right to exercise control over the child.
 Minors: The general rule is that a minor
can enter into any contract that an adult
can, except contracts prohibited by law
for minors.
 A contract entered into by a minor is
voidable at the option of that minor,

subject to certain exceptions. 
 Disaffirmance: The legal avoidance, or
setting aside, of a contractual obligation.
A minor must express his or her intent,
through words or conduct, not to be
bound to the contract.
The minor must disaffirm the entire
contract, not merely a portion of it.
 Disaffirmance:
Only the minor may disaffirm; any
adult party to the contract remains
bound unless and until the minor’s
disaffirmance releases her. 
 Disaffirmance within a Reasonable
Time: Contract can be disaffirmed at any
time during minority, or for a reasonable
period after minor is emancipated.
Minor must disaffirm the entire
contract.
Disaffirmance can be expressed or
implied.
 Minors’ Obligations on Disaffirmance:
All states’ laws permit minors to disaffirm
contracts but differ on the extent of a
minor’s obligations on disaffirmance.
Many courts hold that the minor need only
return the goods subject to the contract,
provided the goods are in the minor’s
possession or control. 
 Minors’ Obligations on Disaffirmance:
Some states place an additional duty of
restitution on the minor to restore the
adult party to the position she or he
held before the contract was made.
 Exceptions to a Minor’s Right to Disaffirm:
Minors can disaffirm contracts even when
they have misrepresented their age.
Some states have enacted laws to prohibit
disaffirmance in these situations or when
the minor misrepresented their age while
engaged in business as an adult. 
 Exceptions: A minor who enters into a
contract for necessaries (basic needs such
as food and clothing) may disaffirm the
contract but remains liable for the
reasonable value of the goods.
 These contacts are enforceable only to the
level of value needed to maintain the

minor’s standard of living.
 Ratification is the act of accepting and
giving legal force to an obligation that
previously was not enforceable. A minor
who has reached the age of majority can
ratify a contract expressly or impliedly. 
 Express ratification takes place when the
individual has reached the age of majority
and states orally or in writing that she/he
intends to be bound by the contract.
 Implied ratification takes place when the
minor—on reaching the age of majority—

indicates an intent to abide by the
contract. 
 If a minor fails to disaffirm a contract
within a reasonable time after reaching
the age of majority, then the court must
determine whether the conduct
constitutes ratification or disaffirmance.
 Parents’ Liability: Parents are not usually
liable for contracts made by minor children
acting on their own.
 Businesses normally require parents to
cosign any contract made with a minor.

 The parents are personally obligated under
the contract to perform the conditions of the

contract—even if their child avoids liability.
 Intoxication: A condition in which a

person’s normal capacity to act or think is
inhibited by alcohol or some other drug.
 A contract entered into by an intoxicated
person can be either voidable or valid. 
 Intoxication:
The agreement may be voidable even
with voluntary intoxication if the person
was intoxicated enough to lack mental
capacity.
The contract is enforceable if the person
understood the legal consequences of
the agreement despite intoxication. 
 Intoxication:
Courts look at objective indications of
the intoxicated person’s condition to
determine if he or she lacked the
required capacity.
 Disaffirmance: If a contract is voidable
because one party was intoxicated, that
person must disaffirm while still
intoxicated or within a reasonable time
after becoming sober.
 The person claiming intoxication typically
must be able to return all consideration

received.
 Disaffirmance: Contracts for necessaries
are voidable, but the intoxicated person is
liable in a quasi contract for the
reasonable value of the consideration
received.
 Ratification: An intoxicated person may ratify
a contract expressly or impliedly once sober.
Implied ratification occurs when a person
enters into a contract while intoxicated and
fails to disaffirm the contract within a
reasonable time after becoming sober.
Acts or conduct inconsistent with an intent
to disaffirm will also ratify the contract.
 Mental Incompetence: Contracts made
by mentally incompetent persons can be
void, voidable, or valid. 
 When the Contract Will Be Void:
If a court has previously determined a
person to be mentally incompetent, any
contract made by that person is void.
The court will appoint a guardian who
will represent the mentally incompetent
individual and enter into binding legal
obligations on his or her behalf.
 When the Contract Will Be Voidable:
A party who is not determined to be
mentally incompetent by a court of law
may avoid a contract if at the time of
contracting, that person (1) did not know
he was entering into a contract or (2)
lacked the mental capacity to understand
its nature, purpose, and consequences. 
 When the Contract Will Be Voidable:
Only the incompetent party has the
option of disaffirming his contractual
obligations.
Any competent party to the contract
remains bound unless released by the
incompetent party’s disaffirmance.
 When the Contract Will Be Valid:
A contract entered into by a person who is
mentally ill—but not previously declared
incompetent—may be valid if the person
had capacity at the time the contract was
formed, such as during a lucid interval
(when a person’s intelligence, judgment,
and will are temporarily restored).
§2: LEGALITY (1 OF 21)
 A contract is valid and enforceable
only if it is formed for a legal
purpose.
 A contract to do something that is
prohibited by federal or state
statutory law is illegal, void from
the outset, and unenforceable.
LEGALITY (2 OF 21)
 Contracts Contrary to Statute:
Statutes often set forth rules
specifying what may be included in
contracts and what is prohibited.
 Contracts to Commit Crimes: A
contract to commit a crime is
unenforceable and void. 
LEGALITY (3 OF 21)
 Usury: A lender who makes a loan at
an interest rate above the lawful
maximum commits usury.
 Usurious contracts are illegal and may
be void in their entirety, although
most states simply limit the interest
the lender is permitted to collect. 
LEGALITY (4 OF 21)
 Gambling is the creation of risk for
the purpose of assuming it.
 Most gambling contracts are illegal
and unenforceable—even in states
where certain forms of regulated
gambling are permitted. 
LEGALITY (5 OF 21)
 Licensing Statutes: All states require
that certain professionals (e.g.,
physicians) obtain a license from the
state.
 Whether a contract with an
unlicensed person is legal and
enforceable depends on the purpose
of the statute. 
LEGALITY (6 OF 21)
 Licensing Statutes: If the statute’s purpose
is to protect the public, a contract with an
unlicensed practitioner is usually illegal and
unenforceable.
 If the statute’s purpose is to raise
government revenues, a court may enforce
the contract and fine the unlicensed person.
 SEE CASE IN POINT 14.6 STURDZA V. UNITED ARAB
EMIRATES (2011).
LEGALITY (7 OF 21)
 Contracts Contrary to Public Policy:
Some contracts are not enforceable
because of the negative impact they
would have on society.
 Contracts in Restraint of Trade:
Contracts that tend to reduce
competition for the provision of
goods or services in a market.
LEGALITY (8 OF 21)
 Covenants Not to Compete and the Sale
of an Ongoing Business: Many contracts
involve a restraint called a covenant not
to compete (or a restrictive covenant).
 To be enforceable, geographic restrictions
must be reasonable and must be effective
only for a reasonable period of time after
the sale is completed. 
LEGALITY (9 OF 21)
 Covenants Not to Compete in
Employment Contracts: Agreements
not to compete (or noncompete
agreements) may be included in
employment contracts.
 Employees cannot work for
competitors or start competing
businesses for a specified period of
LEGALITY (10 OF 21)
 Covenants Not to Compete in
Employment Contracts:
 Noncompete agreements are legal in most
states if the specified period of time (of
restraint) is not excessive and the geographic
restriction is reasonable. 
 SEE CASE IN POINT 14.7 BROWN & BROWN, INC.
V. JOHNSON (2014).
LEGALITY (11 OF 21)
 Unconscionable Contracts or Clauses:
Contracts whose bargains are so
oppressive that the courts relieve
innocent parties of part or all of their
duties.
LEGALITY (12 OF 21)
 Procedural unconscionability often
involves inconspicuous print,
unintelligible language (“legalese”),
lack of an opportunity to read the
contract or ask questions about its
meaning, or a disparity in bargaining
power between the two parties such
that the weaker party’s consent is not
LEGALITY (13 OF 21)
 Procedural Unconscionability:
 Such situations may involve an adhesion
contract (one that is written exclusively by
one party and presented to the other on a
take-it-or-leave-it basis).
LEGALITY (14 OF 21)
 Substantive unconscionability occurs
when contracts—or portions of
contracts—are oppressive or overly
harsh.
 Courts tend to focus on provisions
that deprive one party of benefits
under the agreement or leave that
party without a remedy for
LEGALITY (15 OF 21)
LEGALITY (16 OF 21)
 Exculpatory Clauses: Release a party
from liability in the event of monetary
or physical injury—no matter who is
at fault.
 Enforceable when they are not against public
policy, are not ambiguous, and do not shield
parties from intentional conduct. 
 SEE CASE ANALYSIS 14.3 HOLMES V.
MULTIMEDIA KSDK, INC. (2013).
LEGALITY (17 OF 21)
 Discriminatory Contracts: Party
promises to discriminate on the basis
of race, color, national origin, religion,
gender, age, or disability are contrary
to both statute and public policy, and
unenforceable.
LEGALITY (18 OF 21)
 Effect of Illegality: An illegal contract is void
and both parties are usually considered to be
in pari delicto (equally at fault).
If the contract is executory, neither party can
enforce it; if it has been executed, neither
party can recover damages.
Generally, the courts do not care if one
wrongdoer in an illegal contract is unjustly
enriched at the expense of the other. 
LEGALITY (19 OF 21)
 Effect of Legality: Exceptions to the
general rule include
 justifiable ignorance of the facts;
 being a member of a protected class who may
enforce an otherwise illegal contract (even if
the other party cannot); and
 withdrawing from an illegal agreement before
any illegality occurs.
LEGALITY (20 OF 21)
 Effect of Legality: Other exceptions to
the general rule include
 a contract that was entered into due to fraud,
duress, or undue influence; and
 severable (or divisible) contracts that consist
of distinct parts which can be performed
separately—with separate consideration
provided for each part.
LEGALITY (21 OF 21)

Clarkson14e - PPT - ch14 Capacity and Legality

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Clarkson14e - PPT - ch14 Capacity and Legality

Uploaded by

Copyright:

Available Formats

BUSINESS LAW

TEXT AND CASES

CLARKSON MILLER CROSS 

CHAPTER 14: CAPACITY

or legal guardian relinquishes the legal

voidable at the option of that minor,

level of value needed to maintain the

minor—on reaching the age of majority—

cosign any contract made with a minor.

the contract to perform the conditions of the

 Intoxication: A condition in which a

person can be either voidable or valid. 

must be able to return all consideration

You might also like