Unit IV Case Study BL

BBA 3210, Business Law 1

Course Learning Outcomes for Unit IV Upon completion of this unit, students should be able to:

4. Describe the circumstances that can affect the enforceability of contracts. 4.1 Explain how the enforceability of a contract can be affected by capacity. 4.2 Recognize how undue influence may affect the enforceability of contracts.

Course/Unit Learning Outcomes

Learning Activity

4.1 Unit Lesson Chapter 11 Unit IV Case Study

4.2 Unit Lesson Chapter 12 Unit IV Case Study

Required Unit Resources Chapter 11: Capacity and Legality Chapter 12: Reality of Assent

Unit Lesson In Unit III, we began a discussion of contracts in general and the first two elements necessary to create a contract (i.e., agreement and consideration). In this unit, we will look into the other two elements necessary to create a contract (i.e., capacity and legality) and consider how assent, a genuine intent to enter into a contract, can determine whether a contract that has all of the required elements can be enforced.

Capacity In the context of contracts, capacity or contractual capacity refers to the mental ability to understand the obligations that are imposed on a party to the contract. It seems logical that if a person does not have the ability to understand what a contract requires, they really should not be required to perform obligations that they did not know they had assumed. It is important to note, though, that contractual capacity focuses on the inability to understand contractual obligations, not whether a party actually understands the contractual obligations they have assumed. For example, if a party just signs a contract without reading it and, therefore, does not know some of the obligations in the contract, a court will usually not allow that party to cancel the contract because that is not an inability to understand the obligation in the contract; rather, it is not taking the opportunity to understand the obligations assumed in the contract. Questions about contractual capacity fall into one of three categories: minority (in the context of contracts— someone who is under the age of 18), mental capacity, and intoxication. All of these categories question the ability of a person to understand their contractual obligations, but each category is founded on a different reason for the lack of capacity.

UNIT IV STUDY GUIDE

Contracts: Capacity, Legality, and Assent

BBA 3210, Business Law 2

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Minority It is assumed that until a person reaches a certain age, they do not have the experience and understanding to really appreciate the obligations that they are assuming in a contract. Most states have determined, usually arbitrarily, that a person is a minor and, therefore, not an experienced and understanding adult until they reach the age of 18. As a result, the first category in the topic of contractual capacity is minority, being a person who has not reached the age of majority in the state where they reside (usually 18) and who cannot make a valid contract. Actually, that is not quite what the law says. The laws say that a person who has not yet reached the age of majority can make a contract but—except for specific cases—can disaffirm or cancel that contract. Of course, saying that a minor can enter into a contract but then have the option to cancel the contract raises further issues. How does a minor cancel a contract? When can a minor cancel a contract? What happens if a minor makes a contract and then does not cancel the contract? What happens to whatever the contract was about if the minor cancels the contract? As might be expected, all of these questions have already arisen and been addressed. A minor can cancel a contract by notifying the other party to the contract that they are cancelling the contract or by doing any act that indicates to a reasonable person that they are canceling the contract. A minor can cancel a contract any time before they reach the age of majority and within a reasonable time after they reach the age of majority. If a minor makes a contract and continues to perform the obligations under the contract after they reach the age of majority, then they have ratified the contract, and they remain bound by the terms of the contract. If a minor cancels a contract, the answer to the question of what happens to whatever the contract was about is not so clear. Traditionally, the answer was that when the minor canceled the contract, all obligations of all parties to the contract were canceled, and whatever the contract was about was left where it was when the contract was canceled. That approach led to an unfair result. For example, a minor buys a car and agrees to pay the purchase price of the car in monthly payments of $250 for 20 months. The minor takes possession of the car, makes the required payments for 5 months, and then cancels the contract. That could leave the car in the possession of the minor and the seller with no car and less money than expected. Therefore, most state laws provide that if a minor cancels a contract because they are a minor, both parties to the contract must be put back in the position they were in just before the contract was made. In the previous example, when the minor canceled the contract, they would have been required to return the car to the seller. When the minor cancels the contract, the 5 months worth of payments is considered a charge for the use of the car; therefore, the seller would not have to refund those payments. In most cases, if the car had been damaged, the minor would also be required to pay the seller for the damage. Mental Capacity The second category that considers contractual capacity looks at a party’s actual mental capacity. Does a party have any condition that deprives them of the mental capacity to understand the obligations that were assumed when the contract was made? This can be a difficult inquiry because the mental capacity that is being considered is the mental capacity of the person at the time the contract was made, not the day before the contract was made or the day after the contract was made. That means that the person’s lack of capacity does not have to be permanent or long-term; it can be the result of a one-time episode that affects mental ability or a temporary condition that results in a lack of mental capacity for a period of time. The easiest case of lack of mental capacity is when a person has been determined by a court to lack mental capacity, and a guardian for that person has been appointed by the court. In that case, the person who has been determined to lack mental capacity simply cannot make a contract, and if they do make a contract, that contract is void, despite what the other party to the contract may or may not have known. If a person has not been determined to lack mental capacity but actually does lack contractual capacity at the time the contract was made, the contract is voidable at the election of the person who lacked mental capacity when the contract was made. That kind of case turns on the ability of the person who claims lack of mental capacity to convince a court that they did lack mental capacity when the contract was made.

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Intoxication The third category that questions contractual capacity is intoxication. If a person is so intoxicated at the time they make a contract that they could not understand the contractual obligations that they were assuming, they have the option of voiding the contract. It does not matter how they became intoxicated or what substance caused them to be intoxicated. If they can convince a court that because of their intoxication they could not understand the obligations they were assuming when the contract was made, the court will allow them to cancel the contract. Legality The last element of a contract is legality; the object of the contract must be something that is legal and that does not contravene public policy. It is usually fairly easy to determine if the object of a contract is legal. Contracts that require the violation of a law are not valid. Likewise, contracts that result in a violation of public policy are also not valid. It can, however, be more difficult to identify a violation of public policy than to identify a violation of the law since determining what a public policy prohibits is not always clear. An example of an agreement that might violate public policy is a contract that prevents someone from carrying on a profession. Sometimes, when a professional sells their business to someone, the contract for the sale of that business prohibits the seller from opening a similar business and competing with the buyer of the business. These contracts are called covenants not to compete, but there are no laws that prohibit such agreements. However, courts have said that covenants not to compete are valid contracts only if the restrictions on competition are reasonable as to the length of time the restriction on competition is effective and the geographical area where the restriction is effective. For example, if a certified public accountant (CPA) sells her accounting practice to someone, and the sale contract prohibits the selling CPA from ever practicing as a CPA anywhere in the United States, a court would say that those restrictions are unreasonable and unenforceable even if the selling CPA agreed to them because the restrictions would prevent that CPA from ever practicing in the United States.

Assent Assent is not strictly an element of a contract, but lack of assent can be a reason that a court will not enforce a contract that includes all of the elements necessary to create a contract. Assent means that the parties to a contract have knowingly and voluntarily agreed to the terms of the contract and that there is a meeting of the minds of the parties to the contract. Questions of whether the parties to the contract assented to the terms of the contract arise in four situations: if mistakes were made in what the parties thought the contract was about, if one of the parties misrepresented to the other party what the contract was about, if either of the parties took unfair advantage of the other party by exercising some influence over the party, and if either of the parties forced the other party to agree to the contract.

Mistake Even in a simple contract, the parties to the contract can have a miscommunication, which results in one or both of the parties being mistaken about the subject or terms of the contract. Generally, a mistake by one party to the contract, a unilateral mistake, is not enough for a court to void the contract. If there has been a mistake by both parties to the contract, a mutual mistake, about the subject or material terms of the contract, a court will invalidate the contract on the theory that if the parties have not really agreed, then there is not contract. For example, Bill owns two cars, a Ford and Chevrolet. The cars have similar values. Steve knows that Bill owns the two cars. Bill offers to sell a car to Steve for $5,000 without specifying which car, but he is intending to sell the Ford. Steve accepts Bill’s offer, assuming that Bill is offering to sell the Chevrolet, which is the car Steve wants to buy. Since Bill and Steve think different cars are the subject of the contract, there has been a mutual mistake, and either Bill or Steve can ask a court to cancel the contract.

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Misrepresentation If one of the parties to a contract has misrepresented something about the subject of the contract or an important term of the contract, whether that misrepresentation will result in a court voiding the contract depends on a few considerations. First, did the party who made the misrepresentation intend that the other party would act on the misrepresentation and enter into the contract? Second, was the misrepresentation material—did it involve an aspect of the agreement that would make a difference about whether the other party would enter into to the contract? If the misrepresentation was material and intentional, a court will invalidate the contract.

Undue Influence If one party to a contract has a special relationship with the other party to the contract and uses that special relationship to induce the other person to enter into the contract, and the contract takes advantage of the other person, that is defined as duress, and a court will invalidate the contract.

Duress Finally, if one party to a contract forces the other party, either by physical threats or even economic threats, to enter into a contract, that is defined as duress, and a court will invalidate the contract. In determining if a contract is enforceable, the first question is whether the elements of a contract (i.e., agreement, consideration, capacity, and legality) are satisfied. If those elements are satisfied, there is a contract. Even if a contract exists, the question of whether it is enforceable can arise if there is an issue with assent. If the assent indicated by the parties to the contract is genuine assent, then the contract is enforceable. If the assent was induced by something like duress or misrepresentation, then the contract is not real. If the assent to the contract was not real, even if the elements of a contract are present, a court may not enforce the contract.

Suggested Unit Resources In order to access the following resource, click the link below. The following reading was required in Unit III. It might be a good idea to review this reading in this unit as it will help you with this unit’s assignment as well. This article discusses concerns of fairness as consumers are constantly made to sign consumer contracts that are long and confusing to non-legal experts. Benoliel, U., & Becher, S. I. (2019). The duty to read the unreadable. Boston College Law Review, 60(8),

2255–2296. https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direc t=true&db=asn&AN=140349133&site=ehost-live&scope=site

BBA 3210, Business Law 5

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Learning Activities (Nongraded) Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information.

View the Unit IV Glossary to review key terms presented in this unit. Alternate format for Unit IV Glossary

Reference Photogl. (n.d.). Books on library shelves (ID 20785201) [Photograph]. Dreamstime.

https://www.dreamstime.com/stock-image-books-library-shelves-image20785201

(Photogl, n.d.)