Contractual Capacity

1
Contractual Capacity

• Chapter 13

2
Limited Capacity

• Minors
• Incompetent Persons
• Intoxication
• Mentally Incompetent Persons

3
Mental Incompetence

• Contracts made by persons who
  are not able to comprehend the subject
  matter, nature and consequences of their actions,
  due to mental illness or intoxications are
  voidable.
• If a person has been adjudged incompetent by a
  court any contract the enter into is void

4
Minors

• Minor Someone below the age of 18
• A minor can enter into any contract that an adult
  can enter into, as long as it is not prohibited
  by law.
• (for example, the sale of alcoholic
• beverages).

5
Minors

• A minor can disaffirm a contract by manifesting
  an intent not to be bound.
• A contract can ordinarily be disaffirmed at any
  time during minority or for a reasonable time
  after a minor comes of age.

6
Dissafirmance

• A minor can disaffirm a fully executed contract
  without placing the adult in status quo.
• A minor must return goods in their possesion

7
Exceptions

• Misrepresentation of Age
• Most courts it makes no difference
• Some courts prohibit the minor to disaffirm
• Some courts allow the minor to diaffirm but allow
  the adult to sue for damages in tort.

8
Exceptions / Necessaries

• Necessaries are food, clothing, shelter,
• medicine, and hospital care-whatever a court
  believes is necessary to maintain a person's
  status.
• A minor may disaffirm a contract for necessaries
  but will be liable for the reasonable value.
  (Necessaries must be necessary)

9
Ratification

• When a minor performs acts inconsistent with
  disaffirmance
• or
  fails to disaffirm an executed
  contract within a reasonable time after reaching
  the age of majority.

10
Legality

• A contract to do something that is illegal is
  void from the outset and unenforceable.

11
Legality

• Contracts may be illegal and void because they
  are
• Contrary to Statute
• or
• Contrary to Public Policy

12
Contrary to Statute / Usury

• Virtually every state has a statute that sets the
  maximum rate of interest that can be charged for
  different types of transactions, including
  ordinary loans.
• A lender who makes a loan at an interest rate
  above the lawful maximum is guilty of usury.

13
Contrary to Statute / Usury

• In a few states, a usurious loan is a void
  transaction, and the lender cannot recover either
  the principal or the interest.
• A number of states allow the lender to
  recover only the principal of a usurious loan
  along with interest up to the legal maximum.
• In other states, the lender can recover the
  principal amount of the loan but not the interest

14
Contrary to Statute / Gambling

• All states have statutes that regulate gambling.
  Traditionally, state statutes have deemed
  gambling contracts to be illegal and thus void.
• Gambling - any scheme that involves
• distribution of property by chance among persons
  who have paid a valuable consideration for the
  opportunity (chance) to receive the property.
• Gambling is the creation of risk for the purpose
  of assuming it.

15
Contrary to StatuteLicensing Statutes.

• All states require that members of certain
  professions or occupations obtain licenses
  allowing them to practice.
• Such as Physicians, lawyers, real estate
  brokers, architects, electricians, and
  stockbrokers

16
Contrary to StatuteLicensing Statutes

• When a person enters into a contract with an
  unlicensed individual, the contract may or may
  not be enforceable, depending on the nature of
  the licensing statute.
• Regulatory - Contract illegal
• Revenue Raising - Contract enforceable

17
Contracts Contrary to Public Policy / Restraint
of Trade

• Contracts in restraint of trade (anticompetitive
  agreements) usually adversely affect the public
  (which favors competition in the economy) and
  typically violate one or more federal or state
  statutes.

18
Contracts In Restraint of Trade Exception

• Covenants not to compete are valid if they are
• Ancillary to another contract
• Sale of Business
• Employment Contract
• To protect interest created in the contract
• No more restrictive than necessary to protect
  those interests.

19
Contracts Contrary to Public Policy/Unconscionable
Contracts

• Contracts which are so unfair that they Shock
  the Conscience
• Procedural Unconscionability.
• Substantive Unconscionability.

20
Contracts Contrary to Public Policy/Unconscionable
Contracts

• Procedural unconscionability has to do with how a
  term becomes part of a contract. Usually
  involves
• Inconspicuous print,
• Unintelligible language
  ("legalese"),
• Lack of an opportunity to read the contract
  or to ask question
• Vastly superior bargaining power (adhesion
  contracts)

21
Contracts Contrary to Public Policy/Unconscionable
Contracts

• Substantive unconscionability characterizes
  those contracts, or portions of contracts, in
  which the terms are oppressive or overly harsh.

22
Contracts Contrary to Public Policy/Exculpatory
Clauses.

• Clauses that release a party from liability in
  the event of monetary or physical injury, no
  matter who is at fault
• Exculpatory clauses may be enforced when the
  parties are private businesses not involved in
  enterprises considered important to the public
  interest. (health clubs, amusement parks, skiing
  facilities, horse-rental concessions, golf-cart
  concessions, and skydiving organizations.)

23
Contracts Contrary to Public Policy/Exculpatory
Clauses.

• Generally, an exculpatory clause will not be
• enforced if the party seeking its enforcement is
  involved in a business that is important to the
  public interest.( public utilities, common
  carriers, banks)
• Exculpatory clauses in rental agreements for
  commercial property are frequently upheld, but
  contrary to public policy and illegal and
  unenforceable when they are included in
  residential property leases.