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Contracts: Capacity, Legality, Assent, and

Form

Contracts: Capacity, Legality, Assent, and

Form

Chapter

9Chapter

9

BUSINESS LAW TODAYBUSINESS LAW TODAY Essentials 9Essentials 9thth Ed. Ed.Roger LeRoy Miller - Institute for University Studies, Arlington, TexasRoger LeRoy Miller - Institute for University Studies, Arlington, TexasGaylord A. Jentz - University of Texas at Austin, EmeritusGaylord A. Jentz - University of Texas at Austin, Emeritus


Learning ObjectivesLearning Objectives

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

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

In what types of situations might voluntary In what types of situations might voluntary consent to a contract’s terms be lacking?consent to a contract’s terms be lacking?

What are the elements of fraudulent What are the elements of fraudulent misrepresentation? misrepresentation?

What contracts must be in writing to be What contracts must be in writing to be enforceable?enforceable?


Contractual CapacityContractual Capacity

The legal ability to enter into a The legal ability to enter into a contractual relationship.contractual relationship.Full competence.Full competence.No competence.No competence.Limited competence.Limited competence.


In most states, a person is no longer a In most states, a person is no longer a minor for contractual purposes at the minor for contractual purposes at the age of 18.age of 18.

A minor can enter into any contract that A minor can enter into any contract that an adult can.an adult can.

A contract entered into by a minor is A contract entered into by a minor is voidable at the option of that minor.voidable at the option of that minor.

MinorsMinors


A contract can be disaffirmed at any time A contract can be disaffirmed at any time during minority or for a reasonable during minority or for a reasonable period after the minor comes of age.period after the minor comes of age.

Minor must disaffirm the entire contract.Minor must disaffirm the entire contract. Disaffirmance can be expressed or Disaffirmance can be expressed or

implied.implied.

DisaffirmanceDisaffirmance


In most states, minor need only return In most states, minor need only return the goods (or other consideration) the goods (or other consideration) subject to the contract, provided the subject to the contract, provided the goods are in the minor’s possession or goods are in the minor’s possession or control.control.

In increasing number of states, the minor In increasing number of states, the minor must restore the adult to the position must restore the adult to the position held before the contract was made.held before the contract was made.

Minor’s Obligation on Minor’s Obligation on DisaffirmanceDisaffirmance


Misrepresentation of Age.Misrepresentation of Age.Generally, minor can disaffirm the contract.Generally, minor can disaffirm the contract.But growing number of states prohibit But growing number of states prohibit

disaffirmance and hold the minor liable.disaffirmance and hold the minor liable.

Contracts for Necessaries.Contracts for Necessaries.Contracts for food, clothing, shelter Contracts for food, clothing, shelter may be may be

disaffirmeddisaffirmed by minor, who remains liable for the by minor, who remains liable for the reasonable value of goods or services.reasonable value of goods or services.

Exceptions to Minor’s Right to Exceptions to Minor’s Right to DisaffirmDisaffirm


Insurance.Insurance. Not viewed as necessaries, so minor can Not viewed as necessaries, so minor can

disaffirm contract and recover all premiums disaffirm contract and recover all premiums paid.paid.

Loans.Loans.Seldom considered to be necessaries.Seldom considered to be necessaries.Exception:Exception:

• Loan to a minor for the express purpose of enabling Loan to a minor for the express purpose of enabling the minor to purchase necessaries.the minor to purchase necessaries.

Exceptions to Minor’s Right to Exceptions to Minor’s Right to DisaffirmDisaffirm


RatificationRatification

Occurs when a minor, on or after Occurs when a minor, on or after reaching majority, indicates (expressly reaching majority, indicates (expressly or impliedly) an intention to become or impliedly) an intention to become bound by a contract made as a minor.bound by a contract made as a minor.

Executed v. Executory contracts.Executed v. Executory contracts.


Contracts.Contracts.Parents not liable (This is why parents are Parents not liable (This is why parents are

usually required to sign any contract made usually required to sign any contract made with a minor).with a minor).

Torts (Statutes Vary):Torts (Statutes Vary):Minors are personally liable for their own torts.Minors are personally liable for their own torts.Liability imposed on parents only for willful Liability imposed on parents only for willful

acts of their minor children.acts of their minor children.Liability imposed on parents for their children Liability imposed on parents for their children

negligent acts that result from their parents’ negligent acts that result from their parents’ negligence.negligence.

Parent’s LiabilityParent’s Liability


Intoxicated PersonsIntoxicated Persons

Lack of contractual capacity at the time Lack of contractual capacity at the time the contract is being made.the contract is being made.

Contract can be either voidable or Contract can be either voidable or valid.valid.Courts look at objective indications to Courts look at objective indications to

determine if contract is voidable.determine if contract is voidable.

If voidable:If voidable:Person has the option to disaffirm, orPerson has the option to disaffirm, orPerson may ratify the contract expressly or Person may ratify the contract expressly or

impliedly.impliedly.


Void.Void. If a person has been adjudged mentally incompetent If a person has been adjudged mentally incompetent

by a court of law and a guardian has been appointed.by a court of law and a guardian has been appointed.

Voidable.Voidable. If the person does not know he or she is entering into If the person does not know he or she is entering into

the contract or lacks the mental capacity to the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences. comprehend its nature, purpose, and consequences.

Valid.Valid. If person is able to understand the nature and effect If person is able to understand the nature and effect

of entering into a contract yet lacks capacity to of entering into a contract yet lacks capacity to engage in other activities.engage in other activities.

Lucid Interval.Lucid Interval.

Mentally Incompetent PersonsMentally Incompetent Persons


LegalityLegality

A contract to do something prohibited by A contract to do something prohibited by federal or state statutory law is illegal federal or state statutory law is illegal and therefore and therefore voidvoid (never existed). (never existed).

Contracts Contracts Contrary to StatuteContrary to Statute..Contracts to commit a crime.Contracts to commit a crime.Usury.Usury.Gambling.Gambling.Licensing Statutes.Licensing Statutes.


Covenants not to Compete and the Sale Covenants not to Compete and the Sale of an Ongoing Business.of an Ongoing Business.Covenants Not to Compete in Employment Covenants Not to Compete in Employment

Contracts are legal as long as the duration and geographic limits are reasonable.

CASE 9.1CASE 9.1 Comedy Club, Inc. v. Improv Comedy Club, Inc. v. Improv West Associates West Associates (2009). (2009). Covenant not to Covenant not to compete for 14 years covering 48 states was too compete for 14 years covering 48 states was too broad and therefore invalid.broad and therefore invalid.

Contracts in Restraint of TradeContracts in Restraint of Trade


ProceduralProcedural Unconsionability: adhesion Unconsionability: adhesion contracts.contracts.

SubstantiveSubstantive Unconsionability: when Unconsionability: when terms of contract are oppressive or terms of contract are oppressive or overly harsh.overly harsh.

Unconscionable ContractsUnconscionable Contracts


Unconscionable ContractsUnconscionable Contracts


Release a party from liability in the Release a party from liability in the event of monetary or physical injury, event of monetary or physical injury, no matter who is at fault. Courts no matter who is at fault. Courts generally view these clauses with generally view these clauses with disfavor. disfavor.

Exculpatory ClausesExculpatory Clauses


Justifiable Ignorance of the Facts.Justifiable Ignorance of the Facts.

Members of Protected Classes.Members of Protected Classes.

Withdrawal from an Illegal Agreement.Withdrawal from an Illegal Agreement.

Severable or Divisible Contracts.Severable or Divisible Contracts.

Contract Illegal through Fraud, Duress, Contract Illegal through Fraud, Duress, or Undue Influence.or Undue Influence.

Effect of IllegalityEffect of Illegality


Voluntary Consent: MistakesVoluntary Consent: Mistakes


MistakesMistakes

Mistake of Value (or Quality).Mistake of Value (or Quality).Contract is enforceable.Contract is enforceable.

Unilateral Mistake (of Fact).Unilateral Mistake (of Fact).Party does not have the right to cancel Party does not have the right to cancel

contract contract unless:unless:• (1) the non-mistaken party knew or should (1) the non-mistaken party knew or should

have known about the mistake, have known about the mistake, oror • (2) there is a clerical error.(2) there is a clerical error.


MistakesMistakes

BilateralBilateral (Mutual) Mistakes—if both are (Mutual) Mistakes—if both are mistaken, either one can cancel the mistaken, either one can cancel the contract.contract.

CASE 9.2CASE 9.2 Inkel v. Pride Chevrolet-Inkel v. Pride Chevrolet-Pontiac, Inc. Pontiac, Inc. (2008). (2008). For mutual mistake to For mutual mistake to occur, both parties must have been mistaken occur, both parties must have been mistaken about a material fact. This was a matter of fact for about a material fact. This was a matter of fact for a jury.a jury.


Contract is voidable by innocent party. Contract is voidable by innocent party. Injured party must show:Injured party must show:Misrepresentation of a Misrepresentation of a material fact material fact (not (not

opinion) by conduct, of law, silence, or words. opinion) by conduct, of law, silence, or words. Opinion is not fact (unless it is an expert Opinion is not fact (unless it is an expert opinion).opinion).

CASE 9.3CASE 9.3 Rosenweig v. Givens Rosenweig v. Givens (2009). (2009). Whether fraud was committed in the context of a Whether fraud was committed in the context of a fiduciary relationship between the parties was a fiduciary relationship between the parties was a question of fact for a jury.question of fact for a jury.

Fraudulent MisrepresentationFraudulent Misrepresentation


Injured party must show (cont’d):Injured party must show (cont’d):Intent to deceive. Also known as “Intent to deceive. Also known as “scienterscienter.”.”Innocent party must have justifiably relied on Innocent party must have justifiably relied on

the misrepresentation.the misrepresentation.Plaintiff must have suffered a legal injury.Plaintiff must have suffered a legal injury.

Fraudulent MisrepresentationFraudulent Misrepresentation


Undue Influence & DuressUndue Influence & Duress

Undue Influence.Undue Influence.Arises from a special relationship of trust.Arises from a special relationship of trust.A stronger party overcomes a weaker party’s A stronger party overcomes a weaker party’s

free will by exerting psychological influence.free will by exerting psychological influence.

Duress.Duress.Threat of physical force or extortion.Threat of physical force or extortion.Can serve as basis for rescission of contract.Can serve as basis for rescission of contract.Economic need, by itself, is not duress.Economic need, by itself, is not duress.


Form: Statute of FraudsForm: Statute of Frauds


Requires certain contracts to be in Requires certain contracts to be in writing and signed to be enforceable, writing and signed to be enforceable, as follows:as follows:Interest in LandInterest in Land: A contract involving an : A contract involving an

interest in land. Includes sales, fixtures, interest in land. Includes sales, fixtures, leases, mortgages, and easements. leases, mortgages, and easements.

One Year RuleOne Year Rule: A contract that by its : A contract that by its terms cannot be performed within 1 year terms cannot be performed within 1 year of execution. of execution.

Statute of Frauds—Writing Statute of Frauds—Writing RequirementRequirement


‘‘One Year Rule’One Year Rule’


Statute of FraudsStatute of Frauds

Collateral PromisesCollateral Promises: answer for the : answer for the debt of another.debt of another.Contracts with Primary vs. Secondary Contracts with Primary vs. Secondary

Obligations. Only secondary obligations must Obligations. Only secondary obligations must be in writing.be in writing.

Exception – “Main Purpose” Rule: guarantor Exception – “Main Purpose” Rule: guarantor seeks to secure personal benefit.seeks to secure personal benefit.

Promises Made in Consideration of Promises Made in Consideration of Marriage. Marriage. Unilateral promise for money or property must Unilateral promise for money or property must

be in writing. be in writing.


Statute of FraudsStatute of Frauds

Contracts for the Sale of Goods Contracts for the Sale of Goods over $500 must be in writing.over $500 must be in writing.

ExceptionsExceptions::Partial performance, detrimental reliance.Partial performance, detrimental reliance.


Statute of Frauds--ExceptionsStatute of Frauds--Exceptions

Exceptions Exceptions to Statute of Frauds:to Statute of Frauds:Admissions by party against whom Admissions by party against whom

enforcement is sought.enforcement is sought.Promissory Estoppel (or Detrimental Promissory Estoppel (or Detrimental

Reliance).Reliance).

Special Special UCC ExceptionsUCC Exceptions..Oral contracts for sale of customized goods Oral contracts for sale of customized goods

may be enforced.may be enforced.Oral contracts between merchants may be Oral contracts between merchants may be

enforced.enforced.


What Constitutes a Writing? What Constitutes a Writing? Written contract(s) or memorandum(s) (paper or Written contract(s) or memorandum(s) (paper or

electronic) SIGNED by the party against whom electronic) SIGNED by the party against whom enforcement is sought (typically the defendant in the enforcement is sought (typically the defendant in the case).case).

Documents can be “incorporated” into each other.Documents can be “incorporated” into each other.

What Must be Contained in the Writing?What Must be Contained in the Writing?Essential terms only.Essential terms only.Must name parties.Must name parties.Be signed by party against whom enforcement is sought Be signed by party against whom enforcement is sought

(usually the Defendant). Proving an “e-signature” is a (usually the Defendant). Proving an “e-signature” is a matter for trial.matter for trial.

Statute of Frauds—Statute of Frauds—Sufficiency of the WritingSufficiency of the Writing