Does a minor have the capacity to enter into an enforceable contract? What does it mean to disaffirm...

• Does a minor have the capacity to Does a minor have the capacity to enter into an enforceable contract? enter into an enforceable contract? What does it mean to disaffirm a What does it mean to disaffirm a contract?contract?• Does an intoxicated person have the Does an intoxicated person have the

capacity to enter into an enforceable capacity to enter into an enforceable contract? contract?

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2

• Does the mental incompetence of Does the mental incompetence of one party necessarily make a one party necessarily make a contract void?contract void?• Under what circumstances will a Under what circumstances will a

covenant not to compete be covenant not to compete be enforceable? When will such enforceable? When will such covenants not be enforced? covenants not be enforced?


• What is an exculpatory clause? In What is an exculpatory clause? In what circumstances might what circumstances might exculpatory clauses be enforced? exculpatory clauses be enforced? When will they not be enforced?When will they not be enforced?


• Contractual Capacity: legal ability to Contractual Capacity: legal ability to enter into a contractual relationship. enter into a contractual relationship. Examples: Examples:–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.


• Minors.Minors.–Generally, at 18 years, a person is

emancipated, and has the legal capacity to enter into any contract that an adult can.–However, a contract entered into by a

minor is voidable at the option of that minor, and can be disaffirmed.


• Minors (cont’d).Minors (cont’d).–Disaffirmance.• A 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 (cont’d).Minors (cont’d).–Minor’s Obligations on Disaffirmance.•Majority Rule: minor need only return

the goods (or other consideration) subject to the contract, provided the goods are in the minor’s possession or control.•Minority Rule.


• Minors (cont’d).Minors (cont’d).–Minor’s Obligations on Disaffirmance.•Minority rule: increasing number of

states hold the minor must restore the adult to the position held before the contract was made.


• Minors (cont’d).Minors (cont’d).–Exceptions to Minor’s Right to

Disaffirm.•Misrepresentation of Age.•Minor Who Conducts Business Like an

Adult.• Contracts for Necessaries.


• Minors (cont’d).Minors (cont’d).–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.–Parents’ Liability: Parents generally not

liable, unless they co-sign with minor.


• Intoxicated Persons.Intoxicated Persons.–Lack of capacity at the time the

contract is being made. Contract is either voidable or valid, depending on circumstances. –Disaffirmance (voidable).–Ratification: after ‘sobering up.’


• Mentally Incompetent Persons.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.


• Mentally Incompetent Persons Mentally Incompetent Persons (cont’d).(cont’d).–Valid: when person is able to

understand the nature and effect of entering into a contract but may lack capacity to engage in other activities (known as “lucid” intervals).


• For a contract to be enforceable, it For a contract to be enforceable, it must be formed for a legal purpose.must be formed for a legal purpose.• A specific clause in contract can be A specific clause in contract can be

illegal, but rest of contract can be illegal, but rest of contract can be enforceable.enforceable.• Contract to commit a tortious act is Contract to commit a tortious act is

illegal.illegal.© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15

• Contracts Contrary to Statute.Contracts Contrary to Statute.–Contracts to do something prohibited

by federal or state statutory law is illegal and therefore void (never existed).–Contracts to Commit a Crime.–Contracts for Usury.


• Contracts Contrary to Statute (cont’d).Contracts Contrary to Statute (cont’d).–Gambling: distribution of property based on

chance among persons who have paid valuable consideration.• Online Gambling: Unlawful Internet Gambling

Enforcement Act (2006) bars electronic payments, and allows civil forfeiture.

–Licensing Statutes.


• Contracts Contrary to Public Policy.Contracts Contrary to Public Policy.–Contracts in Restraint of Trade are

generally void, unless reasonable and ancillary to the contract.• Public policy goal is to promote

competition.


• Contracts Contrary to Public Policy Contracts Contrary to Public Policy (cont’d).(cont’d).–Restraint of Trade (cont’d).• Covenant Not to Compete in Employment

Contract is enforceable as long as time and geographic terms are reasonable.• CASE 12.1 Comedy Club, Inc. v. Improv Comedy Club, Inc. v. Improv

West Associates West Associates (2009). What factors did the court consider?


• Contracts Contrary to Public Policy Contracts Contrary to Public Policy (cont’d).(cont’d).–Restraint of Trade (cont’d).• Enforcement Problems. Court sometimes

resort to contract reformation.


• Contracts Contrary to Public Policy Contracts Contrary to Public Policy (cont’d).(cont’d).–Unconscionable Contracts or Clauses.• Procedural Unconscionability:

inconspicuous print or legalese.–Depends on a party’s lack of knowledge or

expertise.


• Contracts Contrary to Public Policy Contracts Contrary to Public Policy (cont’d).(cont’d).–Unconscionable Contracts or Clauses.• Substantive Unconscionability: contracts

are oppressive or overly harsh.–CASE 12.2 Lhotka v. Geographic Expeditions, Lhotka v. Geographic Expeditions,

Inc. Inc. (2010). What made the arbitration clause unenforceable?


• Contracts Contrary to Public Policy Contracts Contrary to Public Policy (cont’d).(cont’d).–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.


• Generally, illegal contracts are Generally, illegal contracts are voidvoid..–If contract is executory, cannot be

enforced.–Unjust enrichment is not an issue.

• Exceptions:Exceptions:–Justifiable Ignorance of the Facts.–Members of Protected Classes.


• Exceptions (cont’d):Exceptions (cont’d):–Withdrawal from an Illegal Agreement.–Severable or Divisible Contracts.–Contract Illegal through Fraud, Duress,

or Undue Influence.


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