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- Contractual Capacity: The minimum mental capacity required to bind a party to a contract. The law presumes certain classes of persons to lack the capacity to be bound.
- Minors: Subject to contrary law (e.g., a statute prohibiting the sale of cigarettes or alcohol to a minor), unmarried persons younger than the age of majority (or “adulthood”) – typically eighteen (18) years – may enter into any contract an adult may. However, unlike an adult entering into a comparable contract, a minor may have the option to avoid the contract.
- Mental Impairment or Incompetence: Persons who, at the time of contracting, are intoxicated (voluntarily or not) or mentally incompetent can generally avoid a contract they entered into while impaired or incompetent.
- Unlike a void contract, which is unenforceable on its face, a voidable contract is presumptively enforceable.
- Only the incapacitated party (or his guardian) may assert incapacity to avoid the contract.
- The incapacitated party must prove his incapacity when the parties made their contract.
- Disaffirmance: Legally avoiding a contractual obligation by manifesting the intention not to be bound.
- The minor may manifest by words or actions the intent to avoid the contract.
- Generally speaking, a minor may disaffirm a contract at any time during minority or for a reasonable time after the minor reaches the age of adulthood.
- When a minor disaffirms a contract, he can recover all property that he transferred as consideration – even if the transferee subsequently transferred it to a third party.
- The minor must disaffirm in a timely manner.
- The minor must disaffirm the entire contract.
- Only the minor has the option of disaffirming his contractual obligations; any adult party to the contract remains bound by it unless released by the minor’s disaffirmance.
- Emancipation: A child may be deemed a legal adult if
- (1) her parents or legal guardian relinquish legal control
- (2) she engaged in business as an adult, or
- (3) she successfully petitions a court to divest her parents or guardian of legal control.
- Misrepresentations Regarding Age: Most states permit disaffirmance even if the minor misrepresented his age when entering into a contract. However, some states prohibit disaffirmance in such instances, while other states allow disaffirmance but subject the minor to tort liability for her misrepresentation.
- Liability for Necessaries: A minor who enters into a contract to purchase food, shelter, clothing, medical attention, or other goods or services necessary to maintain his well-being will generally be liable for the reasonable value of those goods and services even if he disaffirms the contract.
MINORS’ AND PARENTS’ LIABILITY
- The Minor’s Obligations on Disaffirmance: Upon disaffirmance, a majority of states require only that the minor return any goods or other consideration in his possession.
- However, a growing number of states further require that the minor take whatever additional steps are required to restore the adult to the position he was in prior to entering the contract.
- Parental Liability: As a general rule, a parent is not liable for the contracts made by his minor children unless:
- (1) the parent co-signs the contract, and thereby assumes personal liability for its performance, even if his minor child disaffirms the contract; or
- (2) the minor child committed some wrongful act associated with the contract at the direction of a parent.
- Intoxication: A party whose cognitive abilities were so impaired at the time she entered into a contract that she was
- unable to understand the nature and consequences of the transaction or
- unable to act reasonably in relation to the transaction
- may avoid the contract, even if her intoxication was purely voluntary, if the other party to the transaction knew or had reason to know that she lacked the capacity to be bound.
- Most courts will look for objective indications that the allegedly intoxicated party possessed or lacked the necessary capacity – e.g., negotiating the terms of the contract, committing it to writing, etc.
- Disaffirmance: If a party is entitled to avoid her contract due to intoxication, she may disaffirm it, in the same way as a minor. However, unlike a minor, she will likely be required to make full restitution to the other party before being allowed to disaffirm
- Contracts made by mentally incompetent parties may be void, voidable, or valid, depending on the circumstances.
- Void Contract: A party who has been adjudged mentally incompetent by a court of law prior to entering into a contract, and who has a court-appointed guardian, cannot enter into a legally binding contract – only the guardian may enter into binding contracts on behalf of the incompetent party.
- Voidable Contract: A party who has not been adjudged mentally incompetent by a court of law may, nonetheless, avoid a contract if, at the time of contracting, he (1) did not know he was entering into a contract or (2) lacked the mental capacity to understand its nature, purpose, and consequences.
- Only the incompetent party has the option of disaffirming his contractual obligations; any competent party to the contract remains bound unless released by the incompetent party’s disaffirmance.
- Valid Contract: An otherwise incompetent party who understood the nature, purpose, and consequences of entering into the contract is bound by it.
- Ratification: Accepting and giving legal force to an obligation that previously was (1) not enforceable or (2) voidable. Ratification may be either express or implied.
- Express Ratification: A person lacking contractual capacity at the time they formed a contract may, upon (re-)gaining the necessary capacity to do so, expressly ratify the contract by stating, orally or in writing, that they intend to be bound by the contract.
- Implied Ratification: Likewise, a person lacking contractual capacity at the time they formed a contract may, upon (re-)gaining the necessary capacity to do so, impliedly ratify the contract
- (1) by acting in a manner that is clearly inconsistent with disaffirmance or avoidance, or
- (2) in the case of a minor, by failing to disaffirm within a reasonable time after reaching the age of majority, or
- (3) in the case of an intoxicated person, by failing to disaffirm within a reasonable time after regaining sobriety.
CONTRACTS CONTRARY TO STATUTE
- Statutes sometimes proscribe certain types of contracts or contractual provisions. For example:
- Criminal Contracts: A contract to
- commit a crime is void and unenforceable.
- Usury: A contract requiring a party to pay more than the maximum legal interest rate for a particular type of transaction is illegal and may be void in its entirety – although courts frequently simply reduce the contractual interest rate to the legal maximum.
- Gambling: Most gambling contracts are illegal and unenforceable, even in states where certain forms of regulated gambling are permitted.
- Licensure: All states require that members of certain professions (e.g., attorneys, doctors, architects) be licensed by the state.
- A contract with an unlicensed individual may be enforceable unless made unenforceable by (1) statute or (2) public policy, as evidenced by the reasons underlying the licensing statute
CONTRACTS IN RESTRAINT OF TRADE
- Contracts in Restraint of Trade: Contracts that tend to reduce competition for the provision of goods or services in a market (e.g., covenants not to compete).
- Restrictive Covenants in the Sale of a Business: Many agreements for the sale of an ongoing business require the seller not to open a competing business within a specified area including the business being sold. To be enforceable, the geographic restriction must be reasonable, and must be effective only for a reasonable period of time after the sale is completed.
- Restrictive Covenants in Employment Contracts: Many employment agreements, likewise, require the employee to refrain from working for a competitor or starting a new business in competition with the employer for a reasonable period of time, and within a reasonably defined geographic area, after the employment relationship ends.
- A restrictive covenant is generally permitted when it is ancillary to an otherwise enforceable contract. If it is not ancillary to an otherwise enforceable contract, or if the terms of the covenant are too restrictive, the covenant will be void.
OTHER CONTRACTS CONTRARY TO PUBLIC POLICY
- Unconscionable Contracts: Contracts that contain terms that unfairly burden one party and unfairly benefit the other.
- Procedural Unconscionability: Arises when one party to the contract lacks or is deprived of any meaningful choice regarding the terms of the contract due to inconspicuous print, unintelligible language, lack of opportunity to read the contract before signing, or lack of bargaining power.
- Substantive Unconscionability: Arises when the contract contains terms that deprive one party of the benefit of its bargain or of any meaningful remedy in the event of breach by the other party.
- Exculpatory Clauses: A contractual provision releasing a party from liability, regardless of fault.
- Not all exculpatory clauses are contrary to public policy. Courts often balance the parties’ freedom to contract against their relative bargaining power and the necessity of the contract’s object.
EFFECT OF ILLEGALITY
- A contract that is contrary to statute or to public policy is, generally, void; and, therefore, unenforceable. In most cases, both parties to a void contract are considered to be equally at fault (in pari delicto), and therefore cannot enforce the contract against the other party. There are some exceptions:
- Justifiable Ignorance: When one of the parties to an illegal contract has no knowledge or any reason to know that the contract is illegal, that party will be entitled to be restored to its pre-contractual situation.
- Protected Classes: When a statute protects a class of people, a member of that class may enforce an otherwise illegal contract, even though the other party cannot.
- Withdrawing from an Illegal Agreement: If a party withdraws from a partial agreement before any illegality occurs, she may recover its value to her.
- A party induced to enter an illegal contract by fraud, duress, or undue influence may either enforce the contract or recover its value to her.
- Severability/Divisibility: If the contract can be divided into legal and illegal parts, a court may enforce the legal parts but not the illegal ones.
MISTAKE ANDMUTUAL MISUNDERSTANDING
- Mistake: An erroneous belief about one or more material facts relating to the subject matter of the contract may empower one or both parties to avoid the contract.
- Unilateral Mistake: A mistake by one contracting party will generally not excuse the mistaken party’s performance unless
- (1) the other party to the contract knew or should have known of the mistake; or
- (2) the mistake was inadvertent, not grossly negligent, and either computational or made in committing to writing the parties’ agreement.
- Mutual Mistake of Fact: A mistake by both contracting parties about the same material fact generally excuses both parties from performing as agreed.
- Mutual Misunderstanding: Either party may avoid a contract if each attached a different reasonable meaning to a material term, neither knowing nor having reason to know that the other party attached a different meaning.
- Fraudulent Misrepresentation: An innocent party induced by a misrepresentation of one or more material facts to enter into a contract may usually avoid the contract if she can prove
- (1) that the other party knowingly, or with reckless disregard for its truthfulness, and with the intent to deceive the innocent party,
- (2) misstated or omitted a material fact on which
- (3) a reasonable person would rely in deciding whether and on what terms to enter into the contract and
- (4) the innocent party, in fact, relied to her detriment.
- Most courts do not require the innocent party to prove an injury if the only remedy she seeks is rescission of the contract. However, in order to recover damages, the innocent party must prove that the misrepresentation caused her loss.
- Negligent Misrepresentation: A material misrepresentation made without knowledge that it is false, reckless disregard for its truthfulness, or any intent to deceive.
TYPES OF MISREPRESENTATION
- Predictions and Expressions of Opinion: Generally, these will not excuse the innocent party, unless the person making the prediction or stating the opinion has superior knowledge of the subject matter and knows or has reason to know that the innocent party intends to rely on the statement.
- Misrepresentation by Conduct: The conduct of a party – particularly a party’s concealment of some material fact from the other party – will support an excuse of misrepresentation.
- Misrepresentation of Law: Generally, this will not excuse the innocent party, unless the speaker is a judge, legislator, or attorney, or otherwise a member of a profession that requires greater knowledge of the law than possessed by the average citizen.
- Misrepresentation by Silence: Generally, neither party to a contract has a duty to come forward and volunteer facts unless the other party asks. However, common and statutory law create a duty to speak in certain situations (e.g., where one is aware of a serious defect or serious risk of injury).
UNDUE INFLUENCE AND DURESS
- Undue Influence arises from relationships in which one party can influence another party to the point of overcoming the influenced party’s free will.
- The essential feature of undue influence is that the party being influenced does not genuinely assent of her own free will.
- If a contract enriches a party at the expense of another whom the enriched party dominates or to whom the enriched party owes fiduciary duties, courts will often presume undue influence.
- Undue influence is grounds for rescinding (or canceling) the contract.
- Duress: Compelling an innocent party to enter into a contract by threatening to harm him or another person, or his livelihood, if he does not agree to the contract.
- Duress is grounds for rescission; although, a party forced to enter into a contract under duress may choose to perform the contract.
THE STATUTE OF FRAUDS
- Statute of Frauds: Unless an exception applies, a party seeking to enforce any of the following types of contracts must produce a signed writing (or its electronic equivalent) evidencing
- (1) a contract involving an interest in real property (e.g., a home mortgage);
- (2) a contract the parties cannot, by its terms, perform within one year after the date the contract was formed (e.g., a five-year employment contract);
- (3) a contract to answer for or guarantee another person’s debt or duty, including an executor’s or administrator’s agreement to answer personally for a decedent’s debts;
- “Main Purpose” Rule: If the party who agrees to guarantee the debt of another does so to secure a personal benefit for themselves, the statute of frauds does not require a writing.
- (4) a contract made in consideration of marriage (i.e., prenuptial agreements); and
- (5) a contract to sell or lease goods for a price of $500 or more or lease payments totaling $1,000 or more.
THE STATUTE OF FRAUDS: EXCEPTIONS
- Partial Performance: If a buyer has taken partial possession of property and paid that part of the contract price attributable to the property received, and if the parties cannot be returned to their pre-contractual positions, a court may order that the remainder of the contract be performed according to its terms.
- Under the UCC, an oral contract is enforceable to the extent that the seller has accepted payment or the buyer has accepted delivery of the goods covered by the oral contract.
- Judicial Admission: If a party admits under oath, in open court, during a deposition, or in response to written interrogatories, the existence of a contract, the contract is enforceable at least to the extent of the admission.
- Promissory Estoppel: If a promisor makes a promise on which the promisee justifiably relies to the promisee’s detriment, the promisor may be estopped from denying the existence and validity of the contract despite the lack of a signed writing satisfying the statute of frauds.
FORM OF THE WRITING
- A written contract, signed by both parties and setting forth their entire agreement, satisfies the statute of frauds. Likewise,
- a writing signed by the party against whom enforcement is sought,
- a confirmation, invoice, sales slip, check, or fax, or
- several documents in combination (the “composite document” rule) will suffice, provided that they set forth the contract’s essential terms.
- An agreement may be signed anywhere on the agreement; moreover, initials, letterhead, a rubber stamp, or even a fax banner may satisfy the signature requirement – as long as the person intended to authenticate the writing by affixing their initials, etc.
Unconscionalbe Clause or Contract
A contract or clause that is void on the basis of public policy because one party, as a result of disproportionate bargaining power, is forced to accept terms that are unfairly burdensome and that unfairly benefit the dominating party.
The act of accepting and giving legal force to an obligation that previously was not enforceable.
Covenant not to Compete
A contractual promise of one party to refrain from conducting business similar to that of another party for a certain period of time and within a specified geographic area.
the threshold mental capacity required by law for a party who enters into a contract to be bound by that contract.
A legal avoidance, or setting aside, of a contractual obligation
Blue Sky Laws
State laws that regulate the offering and sale of securities for the protection of the public.
An agreement made before marriage that defines each partner's ownership rights in the other partner's property upon divorce. Must be in writing to be enforceable.
Statute of Frauds
A state statute under which certain type of contracts must be in writing to be enforceable.
A clause that releases a contractual party from liability in the event of monetary or physical injury, no matter who is at fault.
A contract involving a sale is the only contract relating to an interest in land that must be in writing to be enforceable.Question 1 options:
To recover for fraud, a plaintiff must be under twenty-one years of age.Question 2 options:
Cray returns a digital music player that he bought from Discount City, which refunds the price. Their exchange options:
Gina induces Hugh to enter into a contract for the purchase of a condominium about which Gina knowingly misrepresents a number of material features. When Hugh discovers the truth, he canQuestion 4 options:
1.not rescind the contract.
2. rescind the contract on the basis of fraud.
3. rescind the contract on the basis of mistake.
4. rescind the contract on the basis of undue influence.
2. rescind the contract on the basis of fraud.
Nina and Owen enter into an oral contract for Nina's sale to Owen of a laser printer for $400. Before Owen takes possession of the printer, the contract is enforceable byQuestion 5 options:
1. either party.
2. Nina only.
3. neither party.
4. Owen only.
1. either party.
Mica, a minor, signs a contract to pay Natural Health Club a monthly fee for twenty-four months to use its facilities. Six months later, after reaching the age of majority, Mica continues to use the club. This act isQuestion 6 options:
Olin convinces Pia, who has no artistic ability, that Pia has considerable talent and induces Pia to pay Olin $10,000 for art lessons. When Pia realizes the truth, she files a suit against Olin. Pia is most likely to recover on the basis ofQuestion 7 options:
3. undue influence.
4. none of these choices.
Neil represents himself as a contractor in Ohio, but he is not licensed in that state. A contract between Pam and Neil by which Neil agrees to build a warehouse for Pam in Ohio isQuestion 8 options:
1. enforceable only if Pam does not object after learning of Neil's status.
2. enforceable only if Pam knows that Neil is unlicensed.
3. enforceable only if the outcome is successful.
4. not enforceable.
4. not enforceable.
A covenant not to compete is enforceable only if it is necessary to restrain trade.Question 9 options:
Intoxicated but fully aware of the consequences, Uri agrees to a two-year cell-phone service contract with Wander Talk, Inc., at more than the average market price. This contract isQuestion 10 options:
2. not enforceable because contracting parties can change their minds.
3. not enforceable because the contract clearly favors Wander Talk.
4. not enforceable because Uri was intoxicated when he agreed to it.