Chapter 14: Capacity and Legality

Question 1

Contractual Capacity:

Answer 1

the legal ability to enter into contracts; the threshold mental capacity required by law for a party who enters into a contract to be bound by that contract.

Question 2

If an individual is deemed to have, “No Competence”, is the contract considered void?

Answer 2

Yes.

Question 3

If an individual is deemed to have, “Limited Competence,” is the contract considered void?

Answer 3

Not necessarily; the contract will be considered “voidable” depending whether the individual was lucid or not.

If they were lucid, the contract is enforceable.
If they were not lucid, the contract is not enforceable.

Question 4

In most states, (aka the majority rule) does the condition of the property included in the contract with a minor go into consideration when a minor disaffirms the contract?

Answer 4

No. The condition of the property usually doesn’t matter, and the minor can simply disaffirm the contract by returning the object regardless of what state it is in.

Question 5

In the few states with the Minority rule, does the condition of the property included in the contract with a minor go into consideration when a minor disaffirms the contract?

Answer 5

Yes. The minor is liable for any decrease in value to the consideration during the time the minor held the property.

Question 6

Exceptions to a minor’s right to disaffirm:

Answer 6

• The big ideas are: Misrepresentation of age (fraud), Necessaries, and Ratification. *

The full list:
- misrepresentation of age
- engaging in business as an adult
- marriage contracts
- unjust enrichment (minor must return the consideration to disaffirm)
- contracts to enlist in the armed forces
- contracts for necessaries
- insurance (not a necessary; minor can disaffirm and recover premiums paid)
- loans (not a necessary so generally can be disaffirmed, but not in the case of loans used to purchase necessaries.)

Question 7

Ratification:

Answer 7

the act of enforcing and giving legal force to an obligation that previously was not enforceable.

Question 8

What is express ratification:

Answer 8

when a minor, upon reaching the age of majority, states orally or in writing that they intend to be bound by the contracgt.

Question 9

What is implied ratification:

Answer 9

when a minor, upon reaching the age of majority, indicates intent to be bound by the contract. (courts will look at their behavior, and if they kept the property under consideration, it is assumed that they implied ratification.)

Question 10

True/False: If a minor fails to ratify within a reasonable time of reaching the age of majority and they still have an executory contract, the courts will assume it is ratified.

Answer 10

False: the courts will determine it to be disaffirmed if both parties haven’t fully performed.

Question 11

In the case of a parent’s liability, when do parent’s become liable for their children’s actions?

Answer 11

when they co-sign on their minor’s obligation, they may become liable. However, if they do not co-sign, they will not be held liable for their minor’s actions.

Question 12

A contract entered into by an intoxicated person may be:

Answer 12

Voidable OR Valid (and therefore enforceable.)

Question 13

To disaffirm a contract made while intoxicated, one must:

Answer 13

disaffirm within a reasonable time of becoming sober and return all consideration received unless the consideration was necessaries.

Contracts for necessaries are voidable, but can be held to a quasi contract for the reasonable value of the consideration received.

Question 14

Ratification for a contract made while intoxicated:

Answer 14

Similar to the ratification of a contract by a minor upon reaching the age of majority, but an intoxicated adult may ratify a contract upon becoming sober either expressly or impliedly.

Question 15

Contracts made by a mentally incompetent person may be:

Answer 15

Void, Voidable, or Valid

Question 16

When will a contract entered into by a mentally incompetent person be considered void?

Answer 16

If the courts have previously determined a person to be mentally incompetent, any contract made by that person is void - as if no contract exists. Only the guardian of this person may enter into contracts on their behalf.

Question 17

When will a contract entered into by a mentally incompetent person be considered voidable?

Answer 17

The contract is voidable if the person did not know they were entering into a contract at the time and lacked the mental capacity to comprehend its nature, purpose, and consequences.

The contract is voidable (or can be ratified) at the option of the mentally incompetent person, but not at the option of the other party.

Question 18

When will a contract entered into by a mentally incompetent person be considered valid?

Answer 18

If the person had capacity at the time the contract was formed (during a lucid interval)

Question 19

Contracts Contrary to Statute:

Answer 19

• Usurious Loans
• Gambling Contracts
• Contracts to Commit a Crime
• Contracts by Unlicensed Persons
• Sunday Laws

Question 20

Contracts Contrary to Public Policy:

Answer 20

• Contracts in Restraint of Trade
• Contracts to Commit a Tort
• Unconscionable Contracts
• Adhesion Contracts
• Exculpatory Clauses
• Discriminatory Contracts

Question 21

When is a contract with an unlicensed professional considered illegal and unenforceable?

Answer 21

When the person is engaging in activities pertaining to the public’s protection. (ie - attorneys and electricians.)

Question 22

Why are contracts on the restrictions of trade (non-compete contracts) generally unenforceable?

Answer 22

The US has historically favored the free flow of goods and services, and so it has been determined against public policy to restrict trade.

Question 23

In the event of an enforcement issue for a covenant not to compete contract, when would the courts reform a contract?

Answer 23

Only when necessary to avoid undue burdens or hardships upon the parties.

because reformation of a contract presents a problem as the judge implicitly becomes a party to the contract.

Question 24

Unconscionable contract or clause:

Answer 24

a contract or clause that is void on the basis of violating public policy because one party is forced to accept terms that are unfairly burdensome and unfairly benefit the dominating party.

Question 25

2 types of unconscionability:

Answer 25

Procedural Unconscionability and Substantive Unconscionability

Question 26

Procedural Unconscionability

Answer 26

occurs if a contract is entered into due to a party’s lack of knowledge or understanding of the contract or term.

An adhesion contract: where the contract is only authored by the dominating party and presented on a take it or leave it basis. (not all adhesion contracts are unconscionable, only when they unreasonably favor the drafter)

Question 27

Substantive Unconscionability:

Answer 27

Exists when a contract or one of its terms is overly harsh or oppressive.

Question 28

Exculpatory Clauses:

Answer 28

a clause that releases a contractual party from liability regardless of who is at fault.

Sometimes deemed by courts as unconscionable and against public policy.

Question 29

When will courts enforce exculpatory clauses?

Answer 29

• are reasonable
• do not violate public policy
• do not protect the parties from intentional misconduct.

Question 30

What happens if a contract is deemed to be illegal?

Answer 30

in pari delicto - parties are equally at fault and the courts will leave the parties and neither can recover.

Even if one party benefits due to the illegal contract, the courts leave them alone because they believe that the party entering into the illegal bargain should not be able to ask for help from the courts. Also, they hope that it will deter the party from entering into illegal contracts in the future.

Question 31

If a contract has been deemed illegal but a party also has justifiable ignorance of the facts, can they recover?

Answer 31

Yes, the courts will allow the parties to return to their original positions, but they will not enforce the contract unless the innocent party has fully performed; then the courts may enforce the contract against the other party to perform.

Question 32

When may parties withdraw from an illegal agreement?

Answer 32

Before the illegal part of the bargain has begun. The party simply has to give notice of revocation to the stakeholder.

Question 33

In the case of contracts entered into through the use of fraud, duress, or undue influence, can the party less at fault recover?

Answer 33

The party victim to the fraud, duress, or undue influence may recover for the performance or its value.

Question 34

In the case of severable or divisible illegal contracts, how do the courts enforce them?

Answer 34

The court will enforce the legal portion but not the illegal one so long as the illegal portion does not effect the essence of the bargain.

to be enforced to the ‘fullest extent possible’ is an indication of a divisible contract.