CONTRACTUAL CAPACITY

Contractual Capacity: The minimum mental capacity
required by law for a party who enters into a contract to be
bound by it. Certain persons are generally not considered to
have sufficient capacity to be bound by their contracts:

Minors: In virtually all states, unmarried persons under
the age of eighteen (18) are permitted to enter into any
contract an adult can, provided that the contract is not
one prohibited by law for minors (e.g., agreement to
purchase cigarettes or alcohol). However, unlike those
entered into by adults, contracts entered into by minors
are generally voidable by the minor.

Mentally Impaired or Incompetent Persons: Likewise, contracts entered into by persons who are, at the
time of contracting, intoxicated (voluntarily or not) or
mentally incompetent are generally voidable.

Unlike a void contract, which is unenforceable on its
face, a voidable contract is presumed to be enforceable
but for the presence of some factor – here, the
contractual capacity of one of the parties – permitting a
party lacking capacity to avoid his otherwise valid
contractual obligations.
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 1
Business Law Today: The Essentials (7th ed.)
MINORITY: DISAFFIRMANCE

Disaffirmance: Legally avoiding or setting aside a
contractual obligation. In order for a minor to avoid a
contract, he need only manifest an intention not to be
bound by it.

Generally speaking, a minor may disaffirm a contract at
any time during minority or for a reasonable time
after the minor comes of age.

When a minor disaffirms a contract, he can recover all
property that he has transferred as consideration –
even if it was subsequently transferred to a third party.

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.


Only the minor has the option of disaffirming his
contractual obligations; any adult parties to the
contract remain bound by it unless released by the
minor’s disaffirmance.
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 2
Business Law Today: The Essentials (7th ed.)
MINORITY: EXCEPTIONS


Misrepresentations Regarding Age: Most states will permit
disaffirmance even if the minor misrepresented his age
when entering into the agreement. However, some states

prohibit disaffirmance in all cases where the minor
misrepresented his age,

prohibit disaffirmance in cases where the minor has
engaged in business as an adult,

refuse to allow minors to disaffirm fully performed
contracts, unless they can return all consideration
received, or

permit disaffirmance but subject the minor to tort
liability for his 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.
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 3
Business Law Today: The Essentials (7th ed.)
INTOXICATION

Intoxication: A condition in which a person’s normal
capacity to act or think is inhibited by alcohol or some drug.

If a party was so intoxicated at the time she entered into
a contract as to lack the ability to comprehend the
legal consequences of entering into the contract, then
she may avoid the contract, even if her intoxication was
purely voluntary.

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.
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 4
Business Law Today: The Essentials (7th ed.)
MENTAL INCOMPETENCE

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.
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 5
Business Law Today: The Essentials (7th ed.)
RATIFICATION

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.
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 6
Business Law Today: The Essentials (7th ed.)
CONTRACTS CONTRARY TO STATUTE

Statutes sometimes proscribe certain types of contracts or
contractual provisions. For example:

Usury: Virtually every state has a statute that sets the
maximum rate of interest that can legally be charged for
different types of transactions, including ordinary loans.
Usurious contracts are illegal, and may be void in their
entirety, although most states simply limit the interest
the lender is permitted to collect.

Gambling: Most gambling contracts are illegal and
void, even in states where certain forms of regulated
gambling are permitted.

Blue Laws: Some states and localities prohibit engaging
in certain business activities on Sundays.

Licensing: 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.
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 7
Business Law Today: The Essentials (7th ed.)
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.
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 8
Business Law Today: The Essentials (7th ed.)
OTHER CONTRACTS CONTRARY
TO PUBLIC POLICY


Unconscionable Contracts: Contracts that contain terms that
are unfairly burdensome to one party and unfairly beneficial
to 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.
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 9
Business Law Today: The Essentials (7th ed.)
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.

Withdrawal 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 part(s)
but not the illegal one(s).
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 10
Business Law Today: The Essentials (7th ed.)
GENUINENESS OF ASSENT

A party who demonstrates that he or she did not genuinely
assent to the terms of a contract may avoid the contract.
Genuine assent may be lacking due to mistake, fraudulent
misrepresentation, undue influence, or duress.

As was true with contracts entered into by persons
lacking contractual capacity, contracts lacking genuine
assent are voidable, not void.
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 11
Business Law Today: The Essentials (7th ed.)
MISTAKE

Mistake: The parties entered into a contract with different
understandings of one or more material facts relating to the
subject matter of the contract.

Unilateral Mistake: A mistake made by one of the
contracting parties. Generally, a unilateral mistake will
not excuse performance of the contract unless:
(1) the other party to the contract knew or should
have known of the mistake; or
(2) the mistake is one of mathematics only.

Mutual Mistake of Fact: A mistake on the part of both
contracting parties as to some material fact. In this case,
either party may rescind.

Mutual Mistake of Value: If, however, the mutual
mistake concerns the future market value or some
quality of the object of the contract, either party can
normally enforce the contract.
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 12
Business Law Today: The Essentials (7th ed.)
MISREPRESENTATION

When an innocent party consents to a contract with fraudulent
terms, she may usually avoid the contract, because she did not
genuinely assent to the fraudulent terms.

Elements of Fraudulent Misrepresentation:
(1) A party misrepresented a material fact,
(2) with the intent to deceive an innocent party,
(3) on which the innocent party justifiably relied,
(4) resulting in injury to the innocent party.

Predictions and Expressions of Opinion: Generally,
these will not give rise to an actionable
misrepresentation, unless the person making the
statement has a particular expertise and knows or has
reason to know that the listener intends to rely on the
statement.
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 13
Business Law Today: The Essentials (7th ed.)
INTENT, RELIANCE, AND INJURY

Scienter: A defendant acts with the intent to deceive if he:
(1) knows a statement to be false,
(2) makes a statement he reasonably believes to false,
(3) makes a statement recklessly, without regard to its
truthfulness or falsity, or
(4) implies that a statement is made on the basis of
information that he does not possess or on some other
basis on which it is not, in fact, based.

Reliance: The innocent party must have acted based on
(although not solely based on) the misrepresentation.
Moreover, in many jurisdictions, the innocent party’s reliance
on the misrepresentation must be reasonable.

Injury: Most courts do not require proof of an injury to the
innocent party if the only remedy she seeks is rescission of
the contract – that is, returning the parties to their precontractual positions. However, in order to recover damages,
the innocent party must prove she was injured by the
misrepresentation.
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 14
Business Law Today: The Essentials (7th ed.)
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, in reality, enter into the
contract of her own free will.

If a contract enriches a party at the expense of another
whom the first party dominates or to whom the first
party owes fiduciary duties, courts will often presume
that the contract was made under undue influence.

Under influence is grounds for canceling (or rescinding)
the contract.
Duress: Forcing a party to enter into a contract because of the
fear created by threats to do something wrongful if the party
does not agree to the contract.

While a party forced to enter into a contract under duress
may choose to perform the contract, duress is grounds
for rescission.
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 15
Business Law Today: The Essentials (7th ed.)
THE STATUTE OF FRAUDS

Statute of Frauds: A statute that requires certain types of
contracts to be evidenced by a writing in order to be
enforceable. The following types of contracts generally must
be evidenced by a writing to be enforceable:
(1) contracts involving an interest in real property (e.g., a
home mortgage);
(2) contracts that cannot, by their terms, be performed
within one year after the date the contract was formed
(e.g., a five-year employment contract);
(3) collateral promises, such as promises to answer for or
guarantee the debt or duty of another person and
promises by an executor or administrator to answer
personally for the debts of an estate;

“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) promises made in consideration of marriage (i.e.,
prenuptial agreements); and
(5) contracts for the sale of goods for $500 or more.
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 16
Business Law Today: The Essentials (7th ed.)
THE STATUTE OF FRAUDS: EXCEPTIONS

A contract that might otherwise be unenforceable because it is
not evidenced by a writing may be enforced to some degree
as follows:

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 judicially admits 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 writing satisfying the statute of
frauds.
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 17
Business Law Today: The Essentials (7th ed.)
FORM OF THE WRITING

A written contract, signed by both parties, satisfies the
requirements of the statute of frauds. What else will suffice?

A writing signed by the party against whom
enforcement is sought;

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.

A confirmation, invoice, sales slip, check, or fax, or
any combination thereof; or

Several documents which, in combination, provide the
terms for an agreement.
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 18
Business Law Today: The Essentials (7th ed.)
ESSENTIAL TERMS

The writing need only contain the essential terms:
(1) the names of the parties,
(2) the subject matter of the contract,
(3) the amount of property to be sold or leased or services
to be rendered, and
(4) the consideration given or promised to the party against
whom enforcement is sought.

Whether price is an “essential” term depends on the type
of contract in question.
Ch. 8: Contracts: Capacity, Legality, Assent, and Form - No. 19
Business Law Today: The Essentials (7th ed.)