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MGMT 212
Contract Law: Capacity and Legality (ch 13)
31
Management
Undergraduate 2
06/16/2009

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Term
Minors
Definition
Statutes prescribe the age of majority (18). Minors have right to disaffirm a contract.
Term
Minor's right to disaffirm
Definition
1.) Words or conduct can be used by minor to express intent not to be bound. 2.) Minors may disaffirm contracts during minority and for a reasonable period of time after attaining age of majority. 3.) A minor who is exercising his right of disaffirmance must disaffirm the entire contract. 4.) The contract is voidable by minor, but not by adult.
Term
Minor's obligation on disaffirmance
Definition
1.) Generally, if a minor disaffirms, each paty must bake restitution by returning the consideration received from the other party. 2.) MMajority view: minor musto nly return goods that are in minor's possession or control. Even if goods are damaged, minor has right to disaffirm. Minority rule: if goods are damaged, the minor is required to compensate adult with a "reasonable" amount.
Term
Exceptions of a Minor's Right to disaffirm
Definition
1.) Misrepresentation of age: In most states, if a minor has misrepresented his age in order to induce another person to enter into a contract, the minor may still disaffirm the contract. Fewer states disallow disaffirmance by a minor in this case. 2.) Emancipation: May not disaffirm if married or no longer living at home. 3.) Liability for necessaries (food, clothing, shelter, health services): generally minor may disaffirm a contract for necessaries, but is liable for the reasonable value of necessaries that were furnished to the minor. Insurance is NOT a necessary. Loans aren't usually necessary unless they're so the minor can buy necessaries AND the lender makes sure the money is so spent.
Term
Yale Diagnostic Radiology v. Estate of Harun Fountain
Definition
Boy shot in head, mother can't pay bills, files for bankruptcy. She sues the person who shot her son and received damages. She deposits funds into a fund for the boy. Yale DR sues for funds. Court orders boy to pay b/c medical costs are necessaries.
Term
Ratification by minor
Definition
A contract will be enforceable if the minor indicates an intention to be bound AFTER reaching age of majority. Minors CANNOT ratify.
Term
express ratification
Definition
oral/written ratification
Term
implied ratification
Definition
actions
Term
Silence doesn't = ratification.
Definition
Silence + actions could be ratification.
Term
Parent's liability for minor child's contract and torts
Definition
Parent isn't liable for performance of a contract made by his minor child unless the parent personally obligated himself as a party to the contract, or the contract was for necessaries which the parent failed to furnish. Generally, parents aren't liable for torts committed by their minor children, but may be liable for negligence in failing to exercise parental control over their minor children.
Term
Intoxication
Definition
A contract is voidable if made by a person who was so intoxicated that his judgment was impaired and he didn't comprehend the nature of the transaction and the legal consequences of entering into contract. Contract is voidable if other party fraudulently induced the person to become intoxicated. // Contract can be disaffirmed while a person is intoxicated or within a reasonable time after he becomes sober. Restitution must be made.
Term
Mental incompetence (adjudicated v. unadjudicated)
Definition
A person is considered mentally incompetent if his judgement is impaired b/c he can't understand the nature of a particular transaction (like intoxication). // If adjudicated, contracts entered into by the individual are void. If unadjudicated, contract is voidable by the person while mentally incompetent (or within a reasonable time after regaining mental competency or by his guardian). // Necessaries may be disaffirmed, but party is still liable for reasonable value of the goods/services.
Term
lucid intervals
Definition
temporary restoration of capacity
Term
contracts contrary to statute (5)
Definition
usury, gambling, sabbath (sunday/blue) laws, licensing statutes, contracts to commit crimes
Term
usury (and 2 exceptions)
Definition
statutes fix maximum lawful contract rate of interest that can be charged for a loan of money. Exceptions: Statute doesn't apply to corporate borrowers. Also, higher rates can be charged for small loans. // If a usurious rate charged: 1.) In some states, transaction is void as to the excess interest. 2.) In some states, the transaction is void as to the interest (but not the principal). 3.) In some state, the entire transaction is tainted and void as to principal and interest.
Term
gambling
Definition
The creation of risk and distribution of property by chance among persons who have given consideration in order to participate. Gambling contracts are illegal and thus VOID.
Term
Sabbath (Sunday or blue) laws
Definition
If statute prohibits formation or performance of a contract on Sunday, such contracts are illegal, void, and unenforceable.
Term
Licensing Statutes
Definition
All states have statutes that require licenses to be obtained in order to engage in certain trades, professions, or business. Two reasons for this: 1.) To protect the public (if continued training, schooling, etc required). 2.) To generate revenue (if $ required, but no continuing training). // Some states provide that contracts made by unlicensed persons are void and unenforceable. If the object is to protect the public, contract is void and unenforceable. If contract is for generation of revenue, contract is enforceable.
Term
Contracts to commit crimes
Definition
Agreements are void and unenforceable. If the purpose/performance of the contract becomes illegal by statute after agreement, the parties are discharged from their obligations by operation of law.
Term
Contracts contrary to public policy (7)
Definition
Contracts in restraint of trade, unconscionable contracts, exculpatory clauses, discriminatory contracts, contracts for the commission of a tort, contracts conflicting with public service, agreements obstructing the legal process
Term
contracts in restraint of trade (3 types)
Definition
If two parties enter into an agreement where they exchange mutual promises not to compete with each other and their ONLY objective is to restrict competition, the agreement is void because it's against public policy. // 1.) Ancillary (subsidiary) covenant not to compete. 2.) Contract for the sale of a business. 3.) employment contracts.
Term
Ancillary (subsidiary) covenant not to compete
Definition
Will be enforced if the promise is reasonable. 1.) Covenant not to compete MUST be secondary to the contract. 2.) Must be no more extensive than necessary (a. length of time, b. size of geographic area, c. scope)
Term
Contract for the sale of a business (contract in restraint of trade)
Definition
1.) The seller of a busn agrees not to open another competing store within the area of the store that he is selling. 2.) The resonableness of an ancillary covenant not to compete is determined by the nature of the busn... etc
Term
Employment contracts (contracts in restraint of trade)
Definition
A covenant that an employee will not start a competing business for a certain period after termination of employment. // Covenant is legal so long as the time period and geographical area restrictions are reasonable.
Term
Unconscionable contracts
Definition
A contract where one party receives unusually greater benefit and has superior bargaining power (take it or leave it). "Shocks the conscience" of the court.
Term
Exculpatory clauses
Definition
Clause in a contract that purports to release a party from all liability for property damage or personal injury. // Generally, these clauses aren't enforced when the part seeking its enforcement engages in a business that is important to the public (public utilities, banks, etc). They are enforced when the business isn't essential to the public. // Won't be enforced: 1.) employment contracts relieving employer of liability for on the job injuries. 2.) Rental of commercial property. 3.) Residential property leases.
Term
Discriminatory contracts
Definition
promises to discriminate based upon color, race, religion, national origin, gender.
Term
Contracts for the commission of a tort; contracts conflicting with public service
Definition
against public policy. // Contracts that interfere with a public officer's duties are contrary to public policy. Public officials can't enter into contracts that cause a conflict of interest between their offical duties and private interests.
Term
agreements obstructing the legal process
Definition
agreements that are intended to delay, prevent, or obstruct the legal process are illegal
Term
Effect of illegality
Definition
General rule: an illegal agreement is void, and therefore a court will not aid either party. Exceptions: 1.) justifiable ignorance to the facts that caused the agreement to be illegal. 2.) A member of a class intended to be protected by a statute prohibiting a specific activity may enforce the contract. 3.) Withdrawal from an illegal agreement before illegal performance is rendered. 4.) Contract illegal through fraud, duress, or undue influence--the party induced to enter into an illegal bargain may recover the consideration paid to the guilty party.
Term
severable or divisible contracts
Definition
Courts will enforce legal provisions of a contract if the illegal portions of the contract can be served.
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