Chapter 11: Consideration, Capacity, and Legality Flashcards
Liberty of contract is not
Absolute
What are the two parts of consideration?
Something of legally sufficient value must be given in exchange for the promise
Must be a bargained for exchange (Negotiation)
Promise to do something that one has no prior legal duty to do
Legally sufficient value
Performance of an action that one is otherwise not obligated to undertake
Legally sufficient value
Refraining from an action that one has a legal right to undertake
Legally Sufficient Value
This must be given or promised by the promisor in return for the promisee’s promise, performance, or promise of performance
Bargained for Exchanged
A bargain for exchange must be something of
Legal value
This distinguishes contracts from gifts
Bargain for exchange
A bargain for exchange must be legally __________ to the promisee
Detrimental
A bargain for exchange must be legally detrimental to the promisee or legally _________ to the promisor
Beneficial
How much consideration was given
Adequacy of Consideration
Concerns the fairness of the bargain
Adequacy of Consideration
Generally, a court will not question this
Adequacy of consideration
The law does not protect a person from entering into an
Unwise Contract
A promise to do what one already has a legal duty to do
Preexisting Duty
Does not constitute legally sufficient consideration
Preexisting Duty
If a party is already bound by contract to perform a certain duty, that duty cannot serve as
Consideration for a second contract
A court may allow an exception to the rule if
during the performance of a contract, extraordinary difficulties arise that were totally unforeseen at the time the contract was formed
The law recognizes that two parties can mutually agree to do this
rescind their contract
A remedy whereby a contract is canceled and the parties are returned to the positions they occupied before the contract was made
Recission
An act that takes place before the contract is made and that ordinarily, by itself, cannot be consideration for a later promise to pay for the act
Past Consideration
No promise at all
Illusory Promises
Without consideration and unenforceable
Illusory Promises
The terms of the contract express such uncertainty of performance that the promisor has not definitely promised to do anything
Illusory Promises
Claims are commonly settled through
Accord and satisfaction
The agreement under which one of the parties promises to give or perform
Accord
A debtor offers to pay a lessor amount than the creditor is owed
Accord and Satisfaction
Performance, which takes place after the accord is liquidated
Satisfaction
A debt whose amount has been ascertained, fixed, agreed on, settled, or exactly determing
Liquidated Debt
With this, a balance is still owed
Liquidated Debt
There can be no satisfaction, unless there is first an
Accord
If this happens, accord and satisfaction cannot take place
Liquidated Debt
The amount of the debt is not settled, fixed, agreed on, ascertained, or determined, and the reasonable persons may differ over the amount owed
Unliquidated Debt
If the debt is unliquidated, the balance is
Discharged
If this happens, accord and satisfaction is possible
Unliquidated Debt
A contract in which one party forfeits the right to pursue a legal claim against the other party
Release
Bars any further recovery beyond the terms of
Release
Releases will generally be binding if they are
Given in good faith
Stated in a signed writing and
Accompanied by consideration
Detrimental Reliance
Promissory Reliance
A court may enforce an otherwise unenforceable promise to avoid
an injustice that would otherwise result
To establish promissory estoppel, there must be a clear and definite
promise
List the requirements to establish promissory estoppel
Must be a clear and definite promise
Promisor should have expected that the promise would rely on the promise
Promisee reasonably relied on the promise by acting or refraining from some act
Promisee’s reliance was definite and resulted in substantial detriment
Enforcement of the promise is necessary to avoid injustice
Promissory Estoppel originally applied to situations involving
Gifts and donations to charity
Now, promissory estoppel includes other situations including business transactions in order to
Avoid inequity or hardship
The capacity required by law for a party who enters into a contract to be bound by that contract
Contractual Capacity
Under the age of 18
Minor
Minority status may be terminated by a minor’s
Emancipation
When a child’s parent or legal guardian relinquishes the legal right to exercise control over a child
Emancipation
A minor can enter into any contract an adult can, provided the contract is not one
prohibited by law for minors
A contract entered into by a minor is
Voidable
A contract entered into by a minor is voidable at the option of
the minor
The legal avoidance or setting aside of a contractual obligtion
Disaffirmance
The minor must disaffirm
the entire contract
A minor can recover property that she or he transferred to the adult as
consideration for the contract
Contract can normally be disaffirmed at any time during minority or
for a reasonable time after the minor comes of age
An adult who enters into a contract with a minor cannot avoid his or her
Contractual duties
Disaffirmance is prohibited if the minor has
Misrepresented their age
When the individual, reaching the age of majority, states orally or in writing, that she or he intends to be bound by the contract
Express Ratification
When the individual, reaching the age of majority, behaves in a manner inconsistent with disaffirmance
Implied Ratification
Generally, parents are not liable for the contracts made by minor children acting on their own, except
Contracts for necessaries
A condition in which a person’s normal capacity to act or think is inhibited by alcohol or some other drug
intoxication
If the person was sufficiently intoxicated to lack mental capacity, the transaction may be
Voidable at the option of the intoxicated person
If the intoxicated person understood the legal consequences of the agreement, the contract is
enforceable
A contract with a mentally incompetent person can be
Void, voidable, or valid
How is a contract with a mentally incompetent person void?
If a court has previously determined a person mentally incompetent
How is a contract with a mentally incompetent person voidable?
If a court has not previously judged a person mentally incompetent, and the person did not know he or she was entering into the contract or lacked the mental capacity to comprehend its nature, purpose, and consequences
How is a contract with a mentally incompetent person valid?
If the person had capacity at the time the contract was formed, or had lucid intervals
For a contract to be valid and enforceable, it must be formed for
A legal purpose
Statutes often set forth rules specifying which ___________ may be included in contracts and which are prohibited
Terms and clauses
If the object or performance of a contract is rendered illegal by statute after the contract has been formed, the contract is considered
Discharged by Law
Most states limit the interest that the may collect on the contract to the
Lawful Maximum Interest Rate
Creation of risk for the purpose of assuming it
Gambling
Any scheme that involves the distribution of property by chance among persons who have paid valuable consideration for the opportunity to receive the property
Gambling
All states require members of certain professions to haves licenses. This can be done under the state’s
Police Powers
Whether a contract with an unlicensed person is legal and enforceable depends on
Purpose of the licensing statute
Some contracts are not enforceable because of the negative impact they would have on society. These re
Contracts contrary to public policy
Examples of contracts contrary to public policy include
Contract to commit an immoral act; contract that prohibits marriage
Contracts in restraint to trade are generally
Void
Why are contracts in restraint to trade generally void/unenforceable?
They are contrary to public policy
When is a contract in restraint to trade valid?
When the restraint is reasonable and is an ancillary part of the contract
A contractual promise of one party to refrain from conducting business similar to that of another party for a certain period of time within a specified geographical area
Covenant Not to Compete
A contract between an employer and an employee in which the terms and conditions of employment are stated
Employment Contract
An employment contract can include this
Covenant Not to compete clause upon termination
You can only have a covenant not to compete clause if it protects a
Legitimate Business Interest
A covenant not to compete clause must not be
Any greater than necessary
A court ordered correction of a written contract so that it reflects the true intentions of the parties
Reformation
A contract or clause that is void on the basis of public policy because one party was forced to accepts terms that are unfairly burdensome and that unfairly benefit the stronger party
Unconscionable
Involves inconspicuous print, unintelligible language, or the lack of an opportunity to read the contract or ask questions about its meaning
Procedural Unconscionability
When a party lacks knowledge or understanding
Procedural Unconscionability
A standard-form contract in which the stronger party dictates the terms
Adhesion Contract
No opportunity to negotiate the terms of the contract
Adhesion Contract
Occur when contracts or portions of contracts are oppressive or overly harsh
Substansitive Unconscionability
A contract clause that gives the business entity unrestricted access to the courts but require the other party to arbitrate any dispute with the firm
Substansitive Unconscionability
A clause that releases a contractual party from liability in the event of monetary or physical injury, no matter who is at fault
Exculpatory Clauses
Frequently held to be contrary to public policy
Exculpatory Clauses
Exculpatory Clauses are almost always unenforceable in these
Residential Property Leases
Exculpatory clauses are enforced when they do not contravene public policy, are not ambiguous, and do not claim to
Protect parties from liability for intentional misconduct
An illegal contract is
VOID
An illegal contract is deemed to never have existed, and the courts will aid whom?
Neither party
In Pari Delicto
Both parties are at fault
A plaintiff who suffers a loss because of an illegal bargain will presumably be deterred from entering into similar illegal bargains in the future
Hoped for deterrent effect
Courts will not enforce the contract but will allow the parties to return to their original positions
Justifiable Ignorance of the facts
Courts may permit an innocent party who has fully performed under a contract to enforce the contract against the guilty party under this
Justifiable Ignorance of the facts
A member of protected classes can enforce an illegal contract even if
the other party cannot
State laws that regulate the offering and sale of securities for the protections of the public
Blue Sky Laws
If the illegal part of bargain has not yet been performed, the party rendering performance can withdraw from the contract and
Recover the performance or its value
Consists of distinct parts that can be performed separately with separate consideration provided for each part
Severable, or divisible, Contract
Parties intended that complete performance by each party would be essential
Indivisible Contract
