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Legality and Capacity

This week we will finish up the course by continuing our discussion on contracts.  The week’s discussion will start with an analysis of the last two elements of a valid contract we have not discussed: capacity and legality.

There is a general presumption that parties to a contract have contractual capacity. However, there are situations where this presumption is overcome.  

The first of these situations concerns minors. Ordinarily, individuals may consent and be held to a contract once they turn eighteen.  Before they are 18, the minor is free to enter into contracts. However, the contract is voidable at the minor’s discretion.  To void the contract, the minor only needs to manifest an intent not to be bound. This ability to disaffirm the contract can be done as long as the minor is under 18 and for a reasonable time after turning 18.   However, this does not mean the minor has absolute carte blanche.  The minor does have to return goods still under his or her control if the contract is disaffirmed. Additionally, some states require the minor to pay restitution (or restore the other party to the same condition that party was in before the contract was made).  

The ability to disaffirm the contract is not vitiated even if the minor lies about his or her age in some states. Other states will hold the minor to the contract if there is a misrepresentation of age. Finally, the ability to disaffirm the contract is lost in certain cases. That is the minor will be liable for contracts for necessaries (food, water, and other items necessary for survival). This is to encourage others to contract with the minor when it may be a matter of life or death.  Additionally, minors may ratify (or accept) liability upon reaching their majority. One last note on the contractual liability of minors, parents are not liable for the minor’s contract. 

The second issue to consider relates to intoxicated persons.  Contracts entered into by the inebriated will either be voidable or valid.  To be voidable, the person must be so intoxicated as to lack mental capacity, which is defined as unable to comprehend the consequences of entering a contract.  

The final issue of capacity relates to mentally incompetent persons. When a court adjudges a person to be incompetent and appoints a guardian, any contract made by the incompetent is void.  If the person has not been adjudged incompetent, any contract entered into by them is voidable when the individual doesn’t know he or she is entering a contract or the individual lacks the capacity to comprehend its subject matter, nature and consequences.  If an ordinarily incompetent person understands the contract or has a lucid period, contracts entered into by that person will be enforced. 

A contract must be legal in order to be enforceable. Part of this requirement is that contracts contrary to statue are not enforceable. This will include usurious contracts, gambling contracts, and contracts in violation of licensing statutes.  The more interesting questions concerns contracts that are void for reasons of public policy. For example, contracts in restraint of trade, including covenants not to compete when selling an ongoing business (as when a doctor sells a practice) or not to compete in employment contracts (as with a highly valued employee) will be invalid unless they are tightly limited in the geographic area and amount of time covered.  Finally, the courts will not enforce unconscionable contracts.

Unconscionability has two elements. Procedural unconscionability refers how a term becomes part of the contract. An analysis of this will discuss the parties relative bargaining position. This includes the ages, experience, and education of the parties contracting. Substantive Unconscionability refers to terms that are oppressive or significantly unfair.  When both are present, the courts may hold that the contract is unconscionable and unenforceable as against public policy.  

Consent

This is the final lecture. Here, we will discuss in more detail the objective manifestation of intent required to form a contract. As discussed earlier, offer and acceptance is one requirement of a valid contract. When determining whether there has been agreement, the court will consider if a reasonable observer would believe that an offer and acceptance were made.  In some cases, the court will refuse to enforce a contract because there is a lack of genuine assent.  

Mistake is the first situation that may allow the parties to rescind the contract.  This is not an absolute bar to enforcing the contract. Unilateral mistakes (where only one party is mistaken) do not defeat assent. Additionally, there is no rescission as a right when one party is merely mistaken about value. However, when both parties to a contract are mistaken as to a material fact, either party can rescind the contract at any time. 

This can be a difficult doctrine to apply, so some examples may be helpful. If for example a seller sells what he thinks is a worthless gem to a buyer but the gem turns out to be very valuable, the seller may not void the contract as this is a unilateral mistake (and a mistake about value).  For another example, let’s consider a boat. If a seller decides to sell a motor boat called the Essex but the buyer thinks it’s a yacht, the contract will be voidable at either’s discretion because both were laboring under a mutual mistake. 

Fraudulent misrepresentation will vitiate consent. In this situation, the innocent party is permitted to rescind the contract and be restored to his or her original position.  There are four elements to fraudulent misrepresentation.  There must be a misrepresentation of a material fact. There must be an intent to deceive. The innocent party must justifiably rely on the misrepresentation, and the party seeking to rescind must show that they were injured by the justifiable reliance.    As a practical matter, the first element is the most significant.  But ordinarily silence will not lead to liability for fraudulent misrepresentation unless there is an affirmative duty to disclose facts. This can happen in realty contracts with latent (hidden) defects.  

Undue influence will also allow the innocent party to rescind a contract. This occurs when one party can greatly influence another to the point where the innocent party’s free will is overcome.  These contracts are voidable.  And undue influence is most commonly scrutinized in situations involving fiduciary relationships.  

Duress is the next defense to enforcement.  Duress involves conduct of a coercive nature forcing a party to sign the contract. For example, if an individual forces another to sign a contract on pain of violence, then duress can be used to void the contract.  It is important to note however that being in need or under a lot of stress does not necessarily lead to duress liability. For example, individuals on death row are permitted to plea for another sentence despite potentially facing death if no agreement is made.  

And with that class, we have come to the end of the course. Be sure to take the end-of-class survey and the final.  

ESSAY ASSIGNMENT

Capacity

Lisa is walking down the street in January when she notices a young man named Denny.  Denny looks a little worse for wear, so Lisa offers to buy him lunch. As they are talking, Denny says to Lisa: “I’m in a pretty rough spot. I don’t have any money right now. But I promise to pay you $450 if you give me that coat you are carrying and some food (that sum represents the reasonable value of those items).  Lisa responds: “How old are you?” Denny states that he is 20. However, this is a lie. Denny is actually 16.  Lisa looks him over one more time, and she agrees to the exchange.

Before they leave, Denny says,”Actually, I will promise to give you another $50 if you let me borrow your bike.”

Lisa writes down all of these promises into a contract. Both parties sign the contract, and they go to the bank and have it notarized.

  • A week later Denny trashes the bike, and he tells Lisa that he is not going to pay. Lisa sues Denny in court for breach of contract, and she learns that he is only 16.
  • What is likely to happen in the court case?

The requirements below must be met for your paper to be accepted and graded:  

  • Write between 500 – 750 words (approximately 2 – 3 pages) using Microsoft Word.
  • Attempt APA style, see example below.
  • Use font size 12 and 1” margins.
  • Include cover page and reference page.
  • At least 60% of your paper must be original content/writing.
  • No more than 40% of your content/information may come from references.
  • Use at least two references from outside the course material, preferably from EBSCOhost.  Text book, lectures, and other materials in the course may be used, but are not counted toward the two reference requirement.

Reference material (data, dates, graphs, quotes, paraphrased words, values, etc.) must be identified in the paper and listed on a reference page.Reference material (data, dates, graphs, quotes, paraphrased words, values, etc.) must come from sources such as, scholarly journals found in EBSCOhost, online newspapers such as The Wall Street Journal, government websites, etc.  Sources such as Wikis, Yahoo Answers, eHow, etc. are not acceptable. 

“Contracts: Capacity, Consent, and Legality” – see attached video

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