Contract Law: Void and Voidable Contracts and Capacity to Contract for University Students, Schemes and Mind Maps of Law

Download Contract Law: Void and Voidable Contracts and Capacity to Contract for University Students and more Schemes and Mind Maps Law in PDF only on Docsity! Rowley/K Formation Defenses Spring 2011 1 Contracts Professor Keith A. Rowley William S. Boyd School of Law University of Nevada Las Vegas Spring 2011 Formation Defenses I. “Void” vs. “Voidable” Contracts A. “Void” Contract: A contract that is unenforceable as a matter of law (e.g., a contract for child prostitution). B. “Voidable” Contract: An otherwise enforceable contract that a party may avoid, as a matter of fact, based on one of the following defenses. ♦ A party’s acts or statements after her right to avoidance arises (e.g., ratification or reaffirmance) may cut off her ability to avoid a contract. II. Lack of Capacity A. Contractual Capacity: The minimum legal capacity required to bind a party to a contract he, she, or it allegedly made. 1. Because incapacity may be transient, the key is whether the party has or lacks capacity when the contract forms. 2. Certain persons are generally not considered to have sufficient capacity to be bound by their contracts: a. Minors b. Mentally Ill or Incompetent Persons c. Intoxicated Persons B. Minority: Unmarried minors may enter into any contract an adult can, provided that the contract is not illegal for a minor (e.g., an agreement to buy cigarettes). 1. Voidability: Unlike those entered into by adults, contracts entered into by minors are generally voidable. ♦ Most states recognize that a contract with an infant below a minimum age is void. Rowley/K Formation Defenses Spring 2011 2 2. Disaffirmance: In order for a minor to avoid or set aside a contract, she need only manifest her intention not to be bound by it. a. The minor may manifest her intent to avoid by words or actions. b. Generally speaking, a minor may disaffirm a contract at any time before and for a reasonable time after the minor comes of age. c. The minor must disaffirm the contract in its entirety. d. A disaffirming minor may recover all consideration she provided to the other party – even if the other party to the disaffirmed contract subsequently transferred it to a third party. e. Only the minor may disaffirm; any adult party to the contract remains bound unless the minor disaffirms. f. A minor who fails to timely disaffirm will have constructively affirmed the contract. 3. The Minor’s Obligations: Upon disaffirmance, the minor a. must return any consideration in her possession, and b. may have to restore the adult to the position he was in prior to entering the contract by either i. compensating the adult for any deterioration in value of the consideration caused by the minor’s use, or ii. compensating the adult for any benefit the minor derived from her use of the consideration. 4. Emancipation: If a child’s parents/guardians have relinquished their legal right to control her, she will have the same capacity to contract as an adult. ♦ A married minor is emancipated as a matter of law. 5. Misrepresentations Regarding Age: Most states permit disaffirmance even if the minor misrepresented her age when entering into the agreement. However, some states a. prohibit disaffirmance in all cases where the minor misrepresented her age; b. prohibit disaffirmance in cases where the minor has engaged in business as an adult; Rowley/K Formation Defenses Spring 2011 5 F. Representative Capacity 1. Agency: “[T]he fiduciary relationship that arises when one person (a ‘principal’) manifests assent to another person (an ‘agent’) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.” RESTATEMENT (THIRD) OF AGENCY § 1.01 (2006) (emphases added). 2. Actual Authority a. Express Authority: Authority declared in clear, direct, and definite terms, orally or in writing. b. Implied Authority: Authority that is i. conferred by custom, ii. inferred from the position the agent occupies, or iii. inferred as being reasonably necessary to carry out the agent’s express authority. 3. Apparent Authority: Authority that arises when a principal causes a third party to believe that an agent has authority to act, even though the agent has no express or implied authority with regard to the matter at hand. a. If the third party changes his or her position in reliance on the principal’s representations regarding the agent’s authority, the principal may be estopped from denying that the agent had authority to act. b. By contrast to agency-by-estoppel, where the principal may be estopped from denying that a non-agent is acting on the principal’s behalf, here the person acting on the principal’s behalf is an agent – just not one who has express or implied authority to act with regard to the particular matter at hand. 4. Ratification by the Principal: The express or implied affirmation of a previously unauthorized act of a purported agent. In summary: a. The agent must have acted on behalf of the principal who subsequently ratified the action; b. The principal must affirm the agent’s act in its entirety; c. The principal must affirm before the third party withdraws from the transaction; Rowley/K Formation Defenses Spring 2011 6 d. The principal must have the legal capacity to affirm both when the agent acts and when the principal ratifies; and e. The principal must know all material facts involved in the transaction. ♦ A principal who ratifies without full knowledge may rescind her ratification, but must reimburse the third party for any costs incurred as a result of reasonably relying on the apparent contract. III. Mistake: A belief, not in accord with the facts, relating to a basic assumption on which the contract was made. R2 §§ 151-153. A. Types of Mistakes 1. Unilateral Mistake: Generally, a mistake made by only one of the parties will not excuse her performance of the contract unless: a. the other party to the contract knew or should have known of the mistake; b. enforcing the contract despite the mistake would be unconscionable; or c. the mistake is one of mathematics only; and, even then, her performance will only be excused if she does not bear the risk of mistake. R2 § 153. 2. Mutual Mistake: A mistake on the part of both contracting parties as to some material fact will allow either party may avoid the contract, unless that party bears the risk of mistake. R2 § 152. B. Risk of Mistake: A party bears the risk of mistake if 1. the contract allocates the risk to her; 2. she makes the contract despite having limited knowledge of the relevant facts, but chooses to treat her limited knowledge as sufficient; or 3. a court assigns the risk to her, after the fact, because it is reasonable to do so under the circumstances. R2 § 154. C. Only mistakes of fact are excused, not mistakes of law. Rowley/K Formation Defenses Spring 2011 7 IV. Misrepresentation: An innocent party may usually avoid, for lack of genuine assent, a contract she entered into based on a material misrepresentation. A. Fraud is 1. a misrepresentation or omission 2. of material fact, 3. made knowingly and with the intent to deceive an innocent party, 4. on which the innocent party relied 5. resulting in injury to the innocent party. B. Negligent Misrepresentation shares the same elements as fraud except that the wrongdoer need not have made a misrepresentation knowingly nor acted with the intent to deceive. C. Misrepresentation: An assertion that is not in accord with the facts. R2 § 159. 1. The assertion must relate to something that is a fact at the time the assertion is made, not to a future event or circumstance. R2 § 159 cmt. c. 2. Particular Types of Misrepresentations and Omissions a. Predictions and Expressions of Opinion will generally not excuse performance, unless i. the speaker had particular expertise and knew or had reason to know that the listener intended to rely on the statement; ii. the speaker misrepresented his own opinion; iii. the speaker owed some fiduciary duty to the listener; or iv. the speaker knew or had reason to know that the listener was unduly susceptible to the speaker’s opinion. b. Misrepresentations of Law will not excuse performance, unless the speaker is a member of a profession that commonly requires greater legal knowledge than the average citizen possesses. c. Misrepresentation by Conduct: The conduct of a party – particularly a party’s concealment of some material fact from the other party – will support a claim of misrepresentation. R2 § 160. Rowley/K Formation Defenses Spring 2011 10 VI. Undue Influence: Taking an unfair advantage of another’s weakness of mind or taking an oppressive and unfair advantage of another’s necessity or distress. A. Like duress, undue influence involves coercing a promisor into acting against their free will. B. Unlike duress, undue influence requires no threat, nor does it require that the promisor was left with no other reasonable alternative than that sought by the dominant party. C. R2 § 177: Undue influence can arise when the promisor is unfairly persuaded by 1. someone in a dominant position relative to the promisor, or 2. someone who, because of the close relationship between the promisor and the persuading party, the promisor reasonably believes is looking out for the promisor’s best interest. D. Factors relevant to undue influence 1. discussion of transaction at inappropriate time 2. consummation of transaction in an unusual place 3. insistent demand that business be finished at once 4. extreme emphasis on untoward consequences of delay 5. using multiple persuaders against a single servient party 6. absence of third-party advisers to the servient party 7. statements that there is no time to consult advisers VII. Unconscionability A. 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 1. inconspicuous print, 2. unintelligible language, 3. lack of opportunity to read the contract before signing, or 4. lack of bargaining power. Rowley/K Formation Defenses Spring 2011 11 B. Substantive Unconscionability: Arises when the terms of the contract substantially deprive one party of the benefit of its bargain or of any meaningful remedy for breach by the other party. Put another way, the terms of the contract are so grossly unfair as to “shock the conscience” of the court. C. Courts generally require both substantive and procedural unconscionability. However, some courts will find substantive unconscionability (but not procedural unconscionability) alone sufficient. D. Unconscionability is tested when the contract is formed. R2 § 208. If the contract turns out to be horrible later, that alone does not make it unconscionable. E. If a court determines the contract was unconscionable when made, it may 1. refuse to enforce the contract in its entirety, 2. sever the unconscionable clause and enforce the remainder of the contract, or 3. permit the unconscionable clause to be applied only if its effect is not unconscionable. F. The doctrine is designed to prevent oppression and unfair surprise, not to disturb the parties’ allocation of risks due to superior bargaining power. (See UCC § 2- 302 cmt.) G. Unconscionability is a question of law for the court, but can usually only be decided after the jury has made findings of fact. VIII. Illegality: A contract made illegally or for an illegal purpose may be unenforceable, even if it was not illegal when made. A. Statutes sometimes proscribe certain types of contracts or contractual provisions. For example: 1. 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 may be void in their entirety, but most states simply limit the interest the lender is permitted to collect. 2. Gambling: Most gambling contracts are illegal and void, even in states where certain forms of regulated gambling are permitted. 3. Blue Laws: Some states and localities prohibit engaging in certain business activities on Sundays. Rowley/K Formation Defenses Spring 2011 12 4. Licensing: All states require that members of certain professions (e.g., attorneys, doctors, architects) be licensed by the state. Any contract with an unlicensed individual is illegal and may be unenforceable. 5. Exculpatory Clause: A contractual provision purporting to release a party from liability for its own misdeeds, regardless of fault. B. 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). 1. 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. 2. 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. 3. 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 its terms are too restrictive, the covenant is void. C. Effect of Illegality: An illegal contract – one that is contrary to statute or to public policy – is, generally, void; and, therefore, unenforceable on its face. 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: 1. 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. 2. 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. 3. Withdrawal from an Illegal Agreement: If a party withdraws from an agreement before any illegality occurs, she may recover its value to her. 4. Fraud, Duress, or Undue Influence: 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.