Transcript CONTRACTS UNIT 3 Capacity and Legality Capacity Intoxicated Persons Sufficiently intoxicated to lack mental capacity; i.e.

CONTRACTS UNIT 3
Capacity and Legality
Capacity
Intoxicated Persons
Sufficiently intoxicated to lack mental
capacity; i.e. intoxication impaired
reason and judgment so severely that
the person did not comprehend the legal
consequences of entering into the
contract.
The intoxicated person must be able to
return the consideration received
Capacity
Mentally Incompetent Persons
• Can be void, voidable or valid, depending on the
circumstances.
• If a court has declared a person to be mentally
incompetent, a contract made by that person is simply
void…no contract exists
• If a court has not declared the person incompetent,
but the person was in fact unable to understand the
nature, purpose or consequences of his contract, then
the contract is voidable. The person will have to
return the consideration received, however.
• A mentally incompetent person can make a valid
contract if at the time the contract was formed,
the person had the capacity to make a contract.
Sometimes called a lucid interval.
Legality
To be enforceable, a contract must
have a lawful end or purpose. A
contract to do something that violates
law or public policy will have
enforceability issues.
It may or may not be void; it may be
voidable by either party. Some may
be enforceable, though penalties may
attach.
Legality
Some Common Areas of Contract
Illegality are:
Gambling
Usury
Licensing Statutes
Blue Laws; Sunday Laws
Public Policy
Legality
Al, Beth, Cathy, Don and Ed all worked
together in a Waffle House in Alabama. A
regular customer who frequently traveled to
Florida often brought them Florida lottery
tickets from time to time. They all agreed to
split any winnings that any of them might have
on these tickets.
One of the tickets, Cathy’s, is a $10 million
winner, but Cathy seems to have forgotten
about their agreement. Al, Beth, Don an Ed
sue her for a share of the loot. Are they
likely to be successful?
Legality
In Dickerson v. Deno, the court held
that this contract was “an exchange of
promises to share winnings from the
parties’ individually owned lottery
tickets upon the happening of an
uncertain event” meaning that this was
“a contract founded on a gambling
consideration.” Gambling in Alabama is
illegal, and thus the contract was void.
Legality
Al agrees to loan Bob $10,000. Bob is seriously
desperate, and agrees to pay Al an interest rate
of 48% per year on the loan. Applicable state
usury law provides that the highest lawful rate of
interest is 24%, and prescribes penalties for
violations.
Enforcement issues here are what?
Generally, the statutory penalties apply. They
may involve a forfeiture by Bob of some or all the
interest and some or all of his principal; they may
also require him to pay penalties or attorneys’
fees. In any event, the loan won’t be enforced as
originally written.
Legality
Contracts with Unlicensed Person may or may not
be enforced. Depends upon the type of licensing
statute that’s been violated:
• Regulatory – these licensing statutes are designed to
protect the public from unskilled or unqualified
practitioners, such as medical providers, accountants,
pest control applicators, etc.
• Revenue Raising – these are primarily designed to raise
revenue; they are more like a tax and don’t really impose
any particular qualification or skill requirements on
licensed persons.
Legality
Mickey is a bartender. The state requires him to
maintain a license, but doesn’t require that he pass a
test or take a course of any kind – only requires him
to be 21. Gerald is 20. He’s an adult for most
purposes, but he’s not to be served alcohol. Gerald
runs up a big tab in Mickey’s bar. Mickey demands
payment. Gerald counters that because Mickey
doesn’t have a license and Gerald’s underage, the
contract is not enforceable.
IS IT?
Probably enforceable; Gerald will have to pay his
bar tab. Gerald may have committed a criminal
offense, however.
Legality
The bartender licensing statute is probably not
regulatory. It doesn’t require anything other than
that Mickey be 21. Where statute is not
regulatory, the courts generally don’t void
contracts with unlicensed persons, though they may
sanction those persons who violated the statute by
not obtaining a license.
On the other hand, where the statute is regulatory,
contracts made with unlicensed persons are
generally illegal and unenforceable. Also many times
the statutes themselves provide that the agreements
can’t be enforced.
Legality
Out of work, about to lose his home, and desperate
for money, Larry decided to sell the youngest of his 3
children through a videotaped ad to show to potential
purchasers. A babysitter alerted police, who set up a
sting operation. Larry accepted a $10,000 down
payment on a $60,000 contract. Larry was arrested,
but at th time there was no state statute outlawing
what Larry tried to do (there sure is one now).
What if this had been a contract? Enforceable?
No state law was violated. Does that matter?
No – Clearly this is against public policy. No way
this contract would have been enforced.
Legality
Old man Everett is aware that Rhett Butler and his
daughter are becoming quite an “item,” as they are
showing up weekly in the local newspaper’s social
columnist’s description of fancy parties held around
town.
Thinking Mr. Butler to be a scoundrel and a golddigger, he offers to pay Mr. Butler $10,000 if he’ll
agree not to marry his daughter.
Mr. Butler, professing his love, marries the
daughter and Everett sues him. Can he win? Why?
Public policy favors marriage, and an agreement
prohibiting marriage is contrary to that policy.
Legality
Mr. and Mrs. Jones agreed to purchase a freezer for
$900 from a door to door salesman. With taxes and
financing charges, the total came to $1,234.80. The
same freezer is available at a store for $300. After
having made payments of over $600, the Jones’ sued,
seeking a declaration that the contract was not
enforceable.
Any luck?
Actually, yes. Ordinarily a court won’t look beyond
the bargain struck by the parties. However,
sometimes they are so oppressive that the courts will
intervene, on the grounds that the contract is
unconscionable.
Legality
Unconscionability can be of two kinds:
 Procedural. This has to do with how the contract
came to be. Things like extremely unequal bargaining
power; overly complicated contract documents;
adhesion contracts.
 Substantive. This has to do with terms that are just
overly oppressive or harsh. Tremendous disparities in
value changing hands.
Which of these did we have in the prior example
with the Jones? Procedural or Substantive?
Legality
Crusher Mfg. makes its laborers sign off a document
before they get their first paycheck. It says:
In consideration of my continued employment by
Crusher, I agree to be responsible for any injury
that may occur to me, no matter what, and I will
never hold Crusher liable for anything that may
happen at the factory, regardless of whose fault,
and even if due to defective machinery or
negligence or misconduct of myself or some other
employee.
DO YOU THINK THEY CAN ENFORCE THIS? WHY?
This is known as an “exculpatory” clause.
Sometimes in an effort to avoid liability, a party will
go so far as to create an unconscionable shifting of
risk. This is easier to find in some contexts than in
others.
Legality
The Kansas attorney general was
concerned about out-of-state physicians
who offered to contract with Kansas
residents to prescribe medications for
them over the internet. He sued to
stop them, claiming these contracts
were unconscionable and therefore
against public policy.
Think he got anywhere with this?
Legality
The court said it couldn’t find any
evidence that the doctors had deceived,
oppressed, or misused superior
bargaining power.
The patients were advised how the deal
was going to work on the website, they
consented to it, and they got exactly
what they bargained for. The contracts
were not unconscionable.
Legality
Nabisco and Keebler agree with one another
that each will keep the price of their saltine
crackers at $3.99 a package or more.
Anything wrong with this?
Yes, lots. It’s called price-fixing, and it’s a
federal felony. Why is this bad, though?
Because it is anti-competitive. Agreements like
this have an anti-competitive effect and are
therefore against public policy and
unenforceable. This one is not just against
public policy, it’s illegal per se. It has criminal
implications.
Legality
Victoria Oilwell Supply (VOS) is owned by Cooter,
and has been in business for 25 years, selling
oilfield supplies throughout Texas. Compare:
☺ VOS sells its assets and business to Newcomer
Supply. As a part of the deal, VOS and Cooter agree
not to engage in the sale of oilfield supplies
anyplace in Texas for 5 years.
☺ VOS’s salespeople (who are “at will” employees) all
sign agreements with Newcomer that, if they cease
to work for Newcomer, they won’t go to work for any
competitor in South Texas during the 3 years after
their employment terminates
Legality
Questions:
Don’t both affect competition and restrain
trade?
Does one do so more than the other?
Which do you think is more likely to be
enforceable? Why?
Contracts in restraint of trade are against
public policy and not enforceable unless they
are reasonable. Usually, this means that
they are tied to another valid agreement (said
to be “ancillary” to that other agreement).
Legality
In these examples, both are connected to
other agreements.
• Why is it reasonable to have a noncompete in connection with the sale of a
business?
• Why is it reasonable to have a noncompete in connection with an
employment relationship?
Legality
The non-compete in connection with the sale of the
business is likely to be enforced to protect the
“goodwill” or the “going-concern value” of the
business being sold. If Cooter or VOS could set up shop
next door and keep their old customers, then they would
not have transferred that goodwill to Newcomer.
OK, now think about the employment situation. Is it
any different?
One thing is that the employees are at will employees.
What did we say about the consideration in an at will
employment situation?
Legality
• Remember? It’s illusory – it doesn’t really bind the
employer (or the employee). So first, there is the
question of whether the non-compete is really
connected to another valid agreement.
• Courts are uncomfortable enforcing an agreement
against the employee, when the employer doesn’t
really make any commitment. The employer has the
right to end the employment, then hold the employee
to the non-compete. Seems like a kind of one-way
street.
• In Texas, courts require some specific consideration
flowing from the employer to the employee…in other
words, something to guarantee that the employer has
some skin in the game. More than an illusory promise
of future employment. But a lot less than they used
to require!
Legality
 Texas has stringent requirements for what that
consideration must be. It must somehow support
the need for the non-compete.
 Courts have held that when the employer makes a
non-illusory and enforceable promise to provide the
employee with things like specialized training or
access to trade secrets or proprietary methods, it
becomes reasonable to use a non-compete to protect
that investment or that information.
 However, the employer must bind itself to provide
these things, and not be able to avoid providing them
by terminating at will. Can’t be illusory.
 Finally, in the employment context, the time and
geographic elements have to be no greater than
required to protect those legitimate interests of the
employer.
Effect of Illegality
General Rule: Contract won’t be enforced
 Courts won’t aid either party; let the chips fall
where they may. If the contract is executory,
neither party can enforce it; if it is executed,
there’s no recovery. Unjust enrichment is not a
concern.
 Policy behind this is to provide a deterrent.
Remove the predictability so that parties won’t
contract in violation of the law.
 There are exceptions…of course!
Effect of Illegality
Ted Trucker contracts to ship a box to the Port
of Victoria for his regular charge of $500. Ted
didn’t know it, but it turned out the box is packed
with contraband, the transportation of which was
illegal.
This is one exception to the general rule:
Justifiable Ignorance. Ted can probably still
collect his fee, if he was justifiably ignorant
of the box’s contents.
Effect of Illegality
Ted Trucker works for a trucking company.
Against state law, it requires its truck drivers
to drive more than a set number of hours per
day. Would the courts enforce Ted’s claim
for payment for the entire number of hours
he actually drove, even though it was an illegal
amount?
Sure…this is another exception – Ted’s a member
of the protected class, the people who are
benefited by the statute that is violated.
Effect of Illegality
Ted and Bob decide to place an illegal bet
on the first game of the Red Sox and
Rockies World Series. They each put up
$100 with Mary. Before the game, can
Ted withdraw?
Yes, the illegality isn’t complete until the bet
is paid. Until then, a party can generally
withdraw from an illegal contract and the
courts will enforce that withdrawal.
Effect of Illegality
An employment contract contains a non-compete that is
clearly unreasonable – requires the employee not to
work for a competitor anywhere in the galaxy for the
entire remainder of time. But, the contract has this
language in it:
The determination that one or more
provisions of this agreement is invalid,
void, illegal or unenforceable shall not
affect or invalidate any other provision
of this agreement.
Another exception: This is called a severability clause;
they are generally enforceable. The rest of the
employment contract may be enforced even if the
non-compete part is not.
Contracts - Unit 4
Assent, Form, Third Party Rights, Discharge, Breach
and Remedies
Genuineness of Assent
MISTAKES
Only certain mistakes have significance
Not a “bad bargain” (e.g. a mistake as to
market conditions or market value) but
mistaken assumptions regarding contract
formation; a mistake of fact.
Genuineness of Assent
Adler contracts to buy 30 acres from Capers because he
believes that he can sell it at a profit to Brennan.
Adler closes on the land, buying it for $4,000 per
acre. However, try as me might, he can’t get an offer
from Brennan for more than $3,000 per acre.
Can Adler undo the sale and get his money back
from Capers?
No, this is a mistake as to market value. Adler is
stuck with the deal that he made.
Genuineness of Assent
What if Adler had contracted to buy the land, but
found out before he closed that he was not
going to be able to sell to Brennan? Would that
make any difference?
No, it would still be a mistake as to market value
or conditions and the courts won’ t normally
provide relief for these kind of mistakes
Genuineness of Assent
Adler buys a painting from Brennan that both he
and Brennan believe to be a Renoir, and very
valuable. Adler pays $2 million for it. However,
it turns out to be a very clever fake by Larry
Slotnick, an art forger. Can Adler avoid the
contract and get his $2 million back?
Yes. Both parties were under the assumption that
the painting was something that it was not; they
all thought is was a valuable Renior, not a
worthless Slotnick.
Genuineness of Assent
Unilateral and Bilateral Mistakes
Adler intends to sell his tractor for $17,500. When
he hears that Brennan is looking for a tractor, he
sends him a letter offering to sell Brennan his
tractor, but he mistakenly types in “$15,700” as
the price. Brennan accepts. Can Adler get
relief?
No, generally, a mistake of fact by one party is not
enough to prevent contract formation. Would
the same result happen if the price stated in the
letter was “$1,570”?
Genuineness of Assent
Adler could probably avoid the bargain in this
situation, since Brennan should have known
that the letter was a mistake. It’s not reasonable
that Adler would sell the tractor for that little.
What if the deal were for a tractor, shredder, post
hole digger and other attachments, and all were
listed in the letter like this:
Genuineness of Assent
Tractor
$13,000
Shredder
$ 2,000
Post Hole Auger
$ 1,000
Rake
$ 500
Disc plow
$ 500
Round Bale Spike
$ 500
TOTAL
$16,000
Again, Adler would have relief, since there is clearly a
math error. The total should be $17,500. Brennan
should have noticed it and realized that Adler did not
mean to sell for the mistaken amount.
Genuineness of Assent
Raffles v. Wichelhaus
Wichelhaus contracted to buy a boat load of Indian cotton
from Raffles. The shipment was to arrive on the
Peerless, sailing from Bombay, India, according to the
contract between them.
When the ship arrived with the cotton Raffles had shipped,
Wichelhaus didn’t accept it, saying that Raffles was late
with his shipment. Wichelhaus contended that the ship
had already arrived, and it did not have his cotton on it.
So he got the cotton he needed elsewhere.
Genuineness of Assent
Raffles said, “Hey, I shipped the cotton per the
agreement…I sent it on the Peerless which sailed from
Bombay in December!”
Wichelhaus replied “I meant that I wanted the cotton to be
on board the Peerless that sailed from Bombay two
months earlier, in October!”
In fact, there were two ships that sailed from Bombay, both
named Peerless…one sailed in October and the other in
December. The contract did not specify which of the two
ships the cotton was to be aboard.
Genuineness of Assent
Court held that when the second ship named Peerless
sailed, a “latent ambiguity” arose, that prevented both
parties from being in consensus as to the meaning of
their agreement. Not a mistake as to market value or
conditions, but as to a material fact – which ship was to
deliver the cotton. There was no meeting of the minds,
no mutual assent. No contract.
What if the contract specifically called for delivery on the
Peerless sailing in October, but Raffles mistakenly
shipped it on the boat sailing in December?
This would have been a unilateral mistake. The court
would enforce the contract as written.
Genuineness of Assent
Bilateral
Mistake
Material
Mistake
Of Fact
Unilateral
Mistake
Contract can be
rescinded by
either party
Contract
enforceable unless:
Other party knew or
should have known
of mistake
Mistake was due to
clear math error,
inadvertent and
w/out gross
negligence
Genuineness of Assent
Adler is selling his house to Brennan. Brennan asks if the
plumbing is of a certain type, and makes it clear that he’s
only interested in buying if this is the kind of plumbing
that’s installed.
Adler knows it’s not that kind of plumbing, but he tells
Brennan that it is, anyway.
Brennan finds out before closing. Can Brennan rescind the
contract?
Sure. A Fraudulent Misrepresentation is another way
that a meeting of the minds can be prevented. Here,
Brennan did not voluntarily agree to buy this house
due to Adler’s fraud. What does fraud require,
though?
Genuineness of Assent
Fraud requires:
• A material misrepresentation
• Intent to deceive
• Justifiable reliance
• If not for recission only, proof of damages
Genuineness of Assent
Same deal – Adler is trying to sell his house to
Brennan, who’s particular about the plumbing.
This time, Adler doesn’t know anything about the
plumbing, but he nevertheless tells Brennan that
it has the kind of plumbing that Brennan wants.
What result now?
Depends. There’s a misrepresentation, looks
like there’s justifiable reliance, question is
whether there is INTENT TO DECEIVE. Is
there SCIENTER here? What if Adler thought
the plumbing was of the right kind but was
just wrong about it?
Genuineness of Assent
What’s the difference between:
Used car dealer telling you that “this 1970
Cadillac will get 63 miles per gallon.”
Your lawyer telling you that if you get a
particular agreement signed, “it will create
a debt in your favor.”
Genuineness of Assent
Is it more reasonable to believe one or the other?
You are more justified in relying on one of
these statements than you are on the other
one. For there to be a fraudulent
misrepresentation that prevents formation of
a contract, you must justifiably rely on the
misrepresentation.
Genuineness of Assent
Adler is elderly. Brennan is his daughter. She lives in the
same town as he, and she takes care of him. His other
daughter, Connor, lives out of state. Adler has always
treated his girls equally, or tried to. As Adler ages,
Brennan begins to work on him, suggesting that Connor
lives away because she’s selfish and doesn’t love Adler,
while she, Brennan, is caring and faithful and would
never leave him. Eventually, Adler agrees to deed
Brennan the ranch, the family’s main asset.
After making the agreement, Adler comes to his senses.
Can he avoid the agreement?
Genuineness of Assent
Yes, if it can be shown that Brennan
exercised undue influence over him.
This is such influence that it overcomes
his normal level of understanding, and
leads him to do something he would not
ordinarily do.
Genuineness of Assent
IRS assesses a huge tax and penalty on Adler.
Adler hires Brennan, and expert lawyer on tax
matters to represent him and resist the
assessment. Two days before the hearing (too
late to get somebody else up to speed), Brennan
refuses to represent Adler unless Adler doubles
his already exorbitant fee. Adler has no choice,
but later sues for damages. Successful? Why?
Brennan secured the amendment by DURESS.
Prevented a meeting of the minds. No assent
Form
How do we know what contracts must be in
writing to be enforceable?
Statute of Frauds – What are these
contracts, generally?
Form
• Contracts involving the sale of Land
• Contracts that cannot by their terms be
performed within 1 year
• Collateral contracts (Guaranties)
• Promises made in consideration of
marriage
• Contracts for the sale of goods priced at
$5,000 or more (under the UCC)
Form
Sufficiency of the Writing
• Adler orally agrees to sell some land to Brennan. Adler
gives Brennan an unsigned memo that contains a legal
description of the land, and Brennan gives Adler an
unsigned first draft of a contract. Adler sends Brennan a
signed letter that refers to the memo and the first draft
contract and to the final draft. Brennan sends Adler an
unsigned final draft contract with a check stapled to it.
Do they have a written agreement?
Yes – does not have to be one document.
Form
Sufficiency of the writing
Adler orally agrees to buy Brennan’s lake house
and lot for $150K. Brennan writes Adler a letter
confirming the sale by identifying the parties and
essential terms of the agreement – price,
method of payment, legal description – and
signs the letter.
Who’s bound?
Brennan only. Must be signed by the party
sought to be bound. Adler didn’t sign
anything…Adler is not bound.