Contracts:Capacity, Legality, and

Enforceability

Chapter 8

Contractual Capacity• The minimum mental capacity required by

law for a party who enters into a contractual agreement to be bound by it.

• Common law recognizes three classes of persons who are generally not considered to have sufficient capacity to be bound by their contracts.

Contractual Capacity• Minors

–under the age of eighteen (18)– contract is voidable at option of minor

(must disaffirm)–minor is required to return consideration

(what’s left of it)– cosignor or guarantor is liable on contract

Contracts With Minors• Parents’ Liability

–As a general rule, parents are not liable for the contracts made by their minor children.

–Unless parent co-signed the obligation

Contracts With Minors• Minor may disaffirm and avoid obligation

under the contract:–Anytime up until a reasonable time after

reaching majority–Minor may ratify contract upon reaching

majority

Contractual Capacity• Mentally Impaired or Incompetent Persons

–Voidable if contract is made while party is mentally incompetent.

–Obligation to return consideration upon avoidance/disaffirmation.

–May be ratified after becoming competent

Contractual Capacity• Intoxicated Persons

–Voidable if contract is made while party is intoxicated.

–No difference if voluntary or involuntary.–May be ratified after becoming sober.

Legality-Illegal Contracts• Contracts Contrary to Statute

–Statutes sometimes proscribe certain types of contracts, contract terms, and/or contractual provisions.

Illegal Contracts• Usury Statutes

–Virtually every state has a statute that sets the maximum rate of interest that can legally be charged for different types of transactions, including ordinary loans.

Illegal Contracts• Gambling - three elements:

–Consideration–Chance–Prize

Illegal Contracts• Blue Laws

–Some states and localities prohibit engaging in certain business activities on Sundays.

Illegal Contracts• Licensing Statutes

–All states require that members of certain professions -- attorneys, doctors, and architects, etc. -- be licensed by the state.

–Contract with unlicensed person may be unenforceable.

Illegal Contracts• Licensing Statutes

–Some statutes are regulatory in nature• Contract with unlicensed person may be

unenforceable.

–Some statutes just produce revenue• Contract with unlicensed person not affected.

Illegal Contracts• Contracts in Restraint of Trade

–Restrictive covenants are generally permitted when they are ancillary to an otherwise enforceable contract for the sale of a business or for employment.

Illegal Contracts• Unconscionable Contracts

–Contracts that require one party, as a consequence of disproportionate bargaining power, to accept terms that are unfairly burdensome to that party and unfairly beneficial to the party with greater bargaining power.

Illegal Contracts

Procedural Unconscionabiltiy – Lack of voluntariness due to disparity in bargaining power.

(Contracts of Adhesion)

Substantive Unconscionability- focus on contracts or provisions that are overly harsh.

Effect of Illegality

• Generally the contract is void (not voidable), due to the “in pari delicto rule.”

• Exceptions (see p. 237):

-One party is relatively innocent, then that party may recover benefits.

-Withdrawal prior to the illegal act.

-Severable or divisible contracts (i.e. overly broad covenant not to compete).

Genuineness of Assent• A party who demonstrates that he or she did

not genuinely assent to the terms of a contract may avoid the contract.

• Genuine assent may be lacking due to mistake, fraudulent misrepresentation, undue influence, or duress.

Mistake• Unilateral Mistake

–A mistake made by one of the contracting parties.

–Generally, a unilateral mistake will not excuse performance of the contract unless other party knew of the mistake OR substantial mathematical error (Example 8.8 p. 238).

Mistake• Mutual Mistake

–A mistake on the part of both contracting parties.

– In this case, either party may rescind.

Fraud• When an innocent party consents to a

contract with fraudulent terms, he or she may usually avoid the contract, because he or she did not genuinely assent to the fraudulent terms.

Fraud• Elements:

–misrepresentation of material fact–made with the intent to deceive (scienter)– justifiable reliance–damages

Undue Influence and Duress• Undue Influence -- arises from relationships

in which one party can influence another party to the point of overcoming the influenced party’s free will.

• Duress -- forcing a party to enter into a contract because of the fear created by threats.

The Statute of Frauds• A statute which requires certain types of

contracts to be in writing in order to be enforceable.

• Some contracts considered important enough that their terms must be memorialized in writing to ensure reliable evidence of their existence and their terms

The Statute of Frauds• Agreements in consideration of marriage-

Prenuptial agreements• Not performable within one year• Involving an interest in land• For sale of goods over $500 ($5,000 under

UCC)• Collateral agreements

The Statute of Frauds: Exceptions

• Admissions• Partial Performance• Custom Orders of Goods• Acceptance of Delivery

The Statute of Frauds: Sufficiency of the Writing

–A writing signed by the party against whom enforcement is sought.

–A confirmation, invoice, sales slip, check, or fax, or any combination thereof.

–Several documents which, in combination, provide the terms for an agreement.

Contracts:Capacity, Legality, and

Enforceability

End of Chapter 8