BUS 115 Chap010 capacity and legality

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  • 1. Chapter 10 Contractual Capacity 10-1
  • 2. Contractual Capacity • Capacity – the legal ability to enter into a contractual relationship • Rebuttable presumption – Presumption of capacity can be attacked by defending party • Disaffirm – to negate or back out of a contract 10-4
  • 3. Minors’ Rights and Obligations • When a minor indicates by a statement or act an intent not to live up to a contract, that minor is entitled to a return of everything given to the other party – Often, even if property is damaged/destroyed – Some jurisdictions allow for deductions due to damage 10-5
  • 4. Case Study – Dodson v. Shrader (Tenn. 1992): » Dodson, 16 years old, bought a truck from Shrader ($4,900). » Nine months later, the truck started having problems. Truck taken to shop and problem diagnosed as burnt valve. » Dodson had no money to fix it, so he drove it until it blew up. » Dodson then attempted to return truck and get money back because he is a minor. Shrader refuses. » Dodson sues Shrader » While at trial, truck hit in Dodson’s yard by hit-and-run driver, truck valued now at ~$500. 10-6
  • 5. Case Study » Dodson v. Shrader (Tenn. 1992): » Court holds that in contract entered into by a minor, if such contract was not unreasonable, no undue influence was used, the minor purchased and paid for the product, and used it for a period of time, the product may be returned but the purchase price can be discounted by the use and damage to the item. 10-7
  • 6. Definition of Minority • Minority – Under common law, was a term that described persons who had not yet reached the age of 21 years – Over time, has been lowered to 18 (in U.S.), with some exceptions – Age of majority by state • In some states, a person becomes an adult at the beginning of the day before his or her 18th birthday 10-8
  • 7. Emancipation and Abandonment • In some jurisdictions, minors who become emancipated, that is, no longer under the control of their parents, are responsible for their contracts • This responsibility means that they cannot void a contract, despite their apparent minority 10-9
  • 8. Emancipation in North Carolina Article 35. Emancipation. § 7B-3500. Who may petition. Any juvenile who is 16 years of age or older and who has resided in the same county in North Carolina or on federal territory within the boundaries of North Carolina for six months next preceding the filing of the petition may petition the court in that county for a judicial decree of emancipation. (1979, c. 815, s. 1; 1998-202, s. 6.) § 7B-3501. Petition. The petition shall be signed and verified by the petitioner and shall contain the following information: (1) The full name of the petitioner and the petitioner's birth date, and state and county of birth; (2) A certified copy of the petitioner's birth certificate; (3) The name and last known address of the parent, guardian, or custodian; (4) The petitioner's address and length of residence at that address; (5) The petitioner's reasons for requesting emancipation; and (6) The petitioner's plan for meeting the petitioner's needs and living expenses which plan may include a statement of employment and wages earned that is verified by the petitioner's employer. (1979, c. 815, s. 1; 1998-202, s. 6.) § 7B-3502. Summons. A copy of the filed petition along with a summons shall be served upon the petitioner's parent, guardian, or custodian who shall be named as respondents. The summons shall include the time and place of the hearing and shall notify the respondents to file written answer within 30 days after service of the summons and petition. In the event that personal service cannot be obtained, service shall be in accordance with G.S. 1A-1, Rule 4(j). (1979, c. 815, s. 1; 1998-202, s. 6.) § 7B-3503. Hearing. 10-10
  • 9. Misrepresentation of Age • Minors sometimes lie about their age when making a contract • Despite this misrepresentation of age, most states will allow the minor to disaffirm or get out of the contract 10-11
  • 10. Contractual Capacity of Minors • Executory contracts (those that have not been fully performed by both parties) may be repudiated by a minor at any time • A promise to deliver goods or render services at some future time need not be carried out by the minor who decides not to do so 10-12
  • 11. Contracts for Necessaries • Necessaries – Goods and services that are essential to a minor’s health and welfare • In general, if a minor makes a contract for necessaries, he/she will be liable for the fair value of those necessaries 10-13
  • 12. Other Contracts Not Voidable • Minors may not: – disaffirm a valid marriage (reader friendly) – repudiate an enlistment contract in the armed forces based on a claim of incapacity to contract – repudiate payments for inoculations and vaccinations required for attendance at a university or college or required in securing a visa for travel in certain foreign lands – Disaffirm student loan contract if 17 or over (in NC) • Minors in NC 10-14
  • 13. Other Contracts Not Voidable • Shield or Sword Doctrine – Minor exploits a law designed to serve as his/her shield and turns it into a sword with which he/she causes harm • Voidable Contracts and Innocent 3rd Parties – Under UCC, innocent 3rd parties protected 10-15
  • 14. Ratification of Minors’ Contracts • Ratification (affirmance) – The willingness to abide by contractual obligations – Done only after reaching age of majority – Can be express or implied • Disaffirmance – Backing out of a contract made during minority once majority is reached 10-16
  • 15. Other Capacity Problems • Persons Mentally Impaired – Voidable if the impairment is so severe that it robs the person of the ability to understand the nature, purpose, and effect of the contract • Persons Legally Insane – A person declared insane by competent legal authority is denied the right to enter contracts – Would result in a void contract 10-17
  • 16. Other Capacity Problems • Persons Drugged or Intoxicated – May be voidable if intoxication is to the point that the contracting party has lost the ability to understand the obligations of the contract, or if can prove the other person was aware and took advantage of their drunken state 10-18
  • 17. Agreements to Engage in Unlawful Activity • A contract may include: – a valid offer, – an effective acceptance, – mutual assent, – competent parties, and – valid consideration – and still be invalid because the agreement involves doing something illegal 10-19
  • 18. Agreements to Engage in Unlawful Activity • The court will leave the parties to an illegal agreement where they placed themselves. • If it is still executory, the court will not order it performed or award damages for breach of contract. • If it has been executed, the court will not award damages or assist in having it annulled. 10-20
  • 19. Agreements Made Illegal Under Statutory Law • These activities include: –usurious agreements –wagering agreements –unlicensed agreements –unconscionable agreements –Sunday (Sabbath) agreements 10-21
  • 20. Usurious Agreements • Usury – Charging more interest than allowed by law • Special statutes, however, allow small loan companies, pawn shops, and other lending agencies that accept high-risk applicants for credit to charge a higher rate of interest 10-22
  • 21. Usury in North Carolina Example Payday Lending APRs 10-23
  • 22. Wagering Agreements • Any agreement or promise concerning a wager or some other form of gambling is invalid and may not be enforced • Exceptions made when bets are placed legally (state lottery, horse racing, church/charity bingo, legal casinos) • Even if gambling is legal in your state, probably still illegal to borrow money for gambling 10-24
  • 23. Wagering Agreements • Theresa Sokaitis v. Rose Bakaysa – Splitting contract, notarized – Rose wins $500,000, splits with brother instead of Theresa – Sues for breach of contract – First court agrees with Rose (summary judgment) – Appellate court reverses – Connecticut Supreme Court affirms Appellate Court’s ruling – At trial, court finally decides in favor of Rose 10-25
  • 24. Unlicensed Agreements • Certain businesses and professions must be licensed before they are allowed to operate legally • Reasons for requiring licensing: – To protect the public – To raise revenue (proceeds often fund regulation) 10-26
  • 25. Unlicensed Agreements • Courts distinguish between licenses purely for revenue and those for public protection – If license required only for revenue, lack of license won’t necessarily void contract – If license for public protection, contract will most likely be void 10-27
  • 26. Unconscionable Agreements • A court will not enforce a contract or any part of a contract that it regards as unconscionable. • An agreement is considered unconscionable if its terms are so grossly unfair that they shock the court’s conscience. 10-28
  • 27. Sunday Agreements • State statutes and local ordinances regulate the making and performing of contracts on Sunday • Usually called blue laws • Blue laws wiki 10-29
  • 28. Sunday Agreements If local laws prohibit Sunday business, two rules are usually observed: 1. Agreements made on Sunday or any other day requiring performance on Sunday may be ruled invalid 2. Agreements made on Sunday for work to be done or goods to be delivered on a business day are valid and enforceable 10-30
  • 29. Agreements Contrary to Public Policy • Public policy – the general legal principle that says no one should be allowed to do anything that tends to injure the public at large. – Any action that tends to harm the health, safety, welfare, or morals of the people 10-31
  • 30. Agreements Contrary to Public Policy • • • • • Obstructing justice Interfering with public service Defrauding creditors Escaping liability Restraining trade 10-32
  • 31. Agreements to Obstruct Justice • Agreements to obstruct justice include: – agreements to protect someone from arrest – to suppress evidence – to encourage lawsuits – to give false testimony – to bribe a juror – promising not to prosecute – promising not to serve as a witness at trial 10-33
  • 32. Agreements Interfering with Public Service • Agreements interfering with public service are illegal and void. – agreements to bribe or interfere with public officials – to obtain political preference in appointments to office – to pay an officer for signing a pardon – to illegally influence a legislature for personal gain 10-34
  • 33. Agreements to Defraud Creditors • Agreements that tend to remove or weaken the rights of creditors, are void as contrary to public policy ex: transferring/destroying/hiding assets to hinder a creditor’s claim on them. 10-35
  • 34. Agreements to Escape Liability • Exculpatory agreement – States that one of the parties, generally the one who wrote the contract, will not be liable for any economic loss of physical injury even if that party caused the loss or injury. • Exculpatory clauses are often not sufficient to release a party from his/her own negligence 10-36
  • 35. Agreements in Restraint of Trade • Restraint of trade – A limitation on the full exercise of doing business with others • Agreements that: – Remove competition – Deny services to the public that they would otherwise have – Result in higher prices and resulting hardship 10-37
  • 36. Agreements to Suppress Competition • Any agreement made with the intent of suppressing competition, fixing prices, and the like is void as an illegal restraint of trade • Rule of reason standard – such agreements are enforceable when they do not unreasonably restrict businesses from competing with one another 10-38
  • 37. Contracts Related to Copyright Infringement • Copyright – designed to protect the rights that attach to an artistic, literary, or musical work. • A copyright holder is given the exclusive right to reproduce, publish, and sell a work that is set in a tangible medium of expression 10-39
  • 38. Contracts Related to Copyright Infringement • Contributory copyright infringement. – Illegal for one party to provide a way for a second party to violate the copyright rights of a third party, even if the provider of the means does not itself violate the original copyright • Fair use – Copying permitted for criticism, comment, news reporting, teaching, scholarship, research 10-40
  • 39. Capitol v. Thomas Thomas suspected of sharing 1,702 songs online via Kazaa, plaintiffs seeking damages for only 24 (is “making available” the same as “distributing”? • Capitol offers $5,000 settlement, Thomas declines • First trial (2007), Thomas ordered to pay $222,000 • Court grants new trial due to error in jury instructions • Before 2nd trial, Capitol offers $25,000 settlement agreement, Thomas again declines • At 2nd trial, jury awards Capitol $1,920,000, judged reduced to $54,000 • 3rd trial, jury awards $1,500,000, judge reduces again to $54,000 • Appellate court reinstates award of $222,000 10-41
  • 40. Sale of Business • When a business is sold, it is common practice for the agreement to contain covenants that restrict the seller from entering the same type of business. • Such restrictive covenants in a contract for the sale of a business will be upheld by the court if they are reasonable in time and geographical area. 10-42
  • 41. Restrictive Employment Covenants • An employment contract that limits a worker’s employment options after leaving her or his present job – “Non-competes” • Must be reasonable with regard to: – Type of work – Length of time – Geographic area 10-43
  • 42. Nondisclosure Agreements • Nondisclosure agreement – requires employees to promise that if they leave their job they will not reveal any confidential trade secrets • Court will step in to prevent information from being revealed or used if . . . 10-44
  • 43. Trade Secrets (1) the information revealed was actually a trade secret (2) the information was crucial to the running of the employer’s business (3) the employer had the right to use the trade secret (4) the former employee came into possession of the trade secret while in a position of trust and confidence and in such a way that it would be unfair for the former employee to disclose that trade secret in a way that would hurt his or her former employer. 10-45
  • 44. Consequences of Illegality • In Pari Delicto (in equal fault) Contracts – When both parties to an illegal agreement are equally wrong in the knowledge of the operation and effect of their contract – Court will not aid either party or award any damages • When not in pari delicto – Relief given, if sought, to the more innocent party 10-46
  • 45. Illegality in Entire Agreement • If the legal part of a contract can be removed from the illegal part, without changing the essential nature of the contract, then agreement is said to be divisible. – Court can enforce the legal part/parts • If not, contract is indivisible, and entire agreement is void 10-47
  • 46. Question? What is an example of a capacity problem? A. Persons Mentally Impaired B. Persons Legally Insane C. Persons Drugged or Intoxicated D. All of the above 10-48
  • 47. Question? What is the legal ability to enter into a contractual relationship? A. Capacity B. Contractualability C. Affirmation D. Competence 10-49
  • 48. Question? What is the willingness to abide by contractual obligations? A. Ratification B. Authorization C. Confirmation D. Authentication 10-50
  • 49. Question? Minors who become _________ are no longer under the control of their parents. A. Competent B. Considerate C. Emancipated D. Open 10-51
  • 50. Question? What term describes persons who have not yet reached the age of 21 years? A. Majority B. Minority C. Mainstream D. Competent 10-52
  • 51. Question? ____________ are those goods and services that are essential to a minor’s health and welfare. A. Needs B. Wants C. Requirements D. Necessaries 10-53