Fundamentals of Business Law
Summarized Cases, 8th Ed., and Excerpted Cases, 2nd Ed.
ROGER LeROY MILLER Institute for University Studies Arlington, Texas
GAYLORD A. JENTZ Herbert D. Kelleher Emeritus Professor in Business Law University of Texas at Austin
Learning Objectives • What are some exceptions to the rule that a minor can disaffirm (avoid) any contract? • Does an intoxicated person have the capacity to enter into an enforceable contract? • Does the mental incompetence of one party necessarily make a contract void? • Under what circumstances will a covenant not to compete not to compete be enforceable? When will such covenants not be enforced? • What is an exculpatory clause? Under what circumstances might exculpatory clauses be enforced when will they not be enforced? Copyright © 2010 South-Western
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Contractual Capacity • Contractual Capacity. – The legal ability to enter into a contractual relationship. • Full competence. • No competence. • Limited competence.
• Legality. – The agreement must not call for the performance of any act that is criminal, tortious, or otherwise opposed to public policy. Copyright © 2010 South-Western
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Minors • In most states, a person is no longer a minor for contractual purposes at the age 18. • A minor can enter into any contract that an adult can. • A contract entered into by a minor is voidable at the option of that minor.
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Disaffirmance • A contract can be disaffirmed at any time during minority or for a reasonable period after the minor comes of age. • Minor must disaffirm the entire contract. • Disaffirmance can be expressed or implied. Copyright © 2010 South-Western
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A Minor’s Obligations on Disaffirmance • In most states, minor need only return the goods (or other consideration) subject to the contract, provided the goods are in the minor’s possession or control. • In increasing number of states, the minor must restore the adult to the position held before the contract was made. Copyright © 2010 South-Western
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Exceptions to Minor’s Right to Disaffirm • Misrepresentation of Age. – Generally, minor can disaffirm the contract. – But some states prohibit disaffirmance and hold the minor liable.
• Contracts for Necessaries. – Contracts for food, clothing, shelter may be disaffirmed by minor, who remains liable for the reasonable value of goods or services.
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Exceptions to Minor’s Right to Disaffirm • Insurance and Loans. – Insurance not viewed as necessaries, so minor can disaffirm contract and recover all premiums paid. – Loans are seldom considered to be necessaries. Exception: • Loan to a minor for the express purpose of enabling the minor to purchase necessaries.
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Ratification by Minor • Occurs when a minor, on or after reaching majority, indicates (expressly or impliedly) an intention to become bound by a contract made as a minor. • Emancipation. – Removes lack of contractual capacity.
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Parents’ Liability • Contracts. – Parents not liable (This is why parents are usually required to sign any contract made with a minor).
• Torts (Statutes Vary): – Minors are personally liable for their own torts. – Liability imposed on parents only for willful acts of their minor children. – Liability imposed on parents for their children negligent acts that result from their parents’ negligence. Copyright © 2010 South-Western
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Intoxicated Persons • Lack of contractual capacity at the time the contract is being made. • Contract can be either voidable or valid. – Courts look at objective indications to determine if contract is voidable.
• If voidable: – Person has the option to disaffirm, or – Person may ratify the contract expressly or impliedly. Copyright © 2010 South-Western
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Mentally Incompetent Persons • Void: If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed. • Voidable: If the person does not know he or she is entering into the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences. • Valid: If person is able to understand the nature and effect of entering into a contract yet lacks capacity to engage in other activities. Lucid Interval. Copyright © 2010 South-Western
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Legality • Contracts Contrary to Statute: A contract to do something prohibited by federal or state statutory law is illegal and therefore void (never existed). • Contract that calls for for a tortious act. • Contract that calls for an act contrary to public policy.
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Contracts Contrary to Statute • • • • •
Contracts to Commit a Crime. Usury. Gambling (online). Sabbath Laws. Licensing Statutes. – Contracts with unlicensed practitioners may not be enforceable.
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Contracts Contrary to Public Policy • Contracts contrary to public policy are void. – Contracts in restraint of Trade. – Covenants Not to Compete and the Sale of an Ongoing Business. – Covenants Not to Compete in Employment Contracts. – CASE 9.1 Stultz v. Safety and Compliance Management, Inc. (Georgia, 2007). Copyright © 2010 South-Western
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Contracts Contrary To Public Policy • Unconscionable Contracts or Clauses. – Procedural Unconsionability (the “how”). – Substantive Unconsionability (oppressive or harsh).
• Exculpatory Clauses. – Releases parties, regardless who is at fault. – CASE 9.2 Speedway SuperAmerica, LLC v. Erwin (Kentucky, 2008). Copyright © 2010 South-Western
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Unconscionability
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Effect of Illegality • • • •
Justifiable Ignorance of the Facts. Members of Protected Classes. Withdrawal from an Illegal Agreement. Contract Illegal through Fraud, Duress, or Undue Influence. • Severable or Divisible Contracts.
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