An introduction to the fundamentals of dynamic business law and business ethics chap010

With the “wind of independence at her back,” Lily entered the dealership, Bjorn Fjord Motors, alone.. After negotiating her best deal and signing a contract for the purchase of a new Fjo

Chapter 10

Capacity and Legality

Chapter 10 Case Hypothetical and Ethical Dilemma

Before her recent accident, eighty-two-year-old Lily Ledbetter was her own chauffeur She used to drive an automobile

to fulfill her once-active senior lifestyle, including outings for bridge tournaments, water aerobics, grocery shopping, bill-paying, and family get-togethers

One day, Lily decided to purchase a new automobile Although her fifty-year-old son Ron suggested that he

accompany her to the car dealership, she refused, reminding him that she was fully capable of taking care of her own

responsibilities With the “wind of independence at her back,” Lily entered the dealership, Bjorn Fjord Motors, alone

After negotiating her best deal and signing a contract for the purchase of a new Fjord Mastodon sedan, Lily drove

away in her rapidly-depreciating asset Five miles down the road, the steering wheel detached from the steering

column (the steering wheel literally came off in her hands) and Lily crashed into a culvert She sustained severe

personal injuries, including (but not limited to) a broken left leg, a broken pelvis, a collapsed lung, and numerous

lacerations to her face Her attending physicians agree that Lily will never be able to drive an automobile again

Lily has since sued Fjord Motors, Inc (the manufacturer of the sedan) and Bjorn Fjord Motors, Inc (the dealership) for personal injury Both companies have filed answers denying liability on the basis of an exculpatory clause included in Lily’s purchase contract The exculpatory clause states that neither Fjord Motor, Inc nor Bjorn Fjord Motors, Inc is

responsible to a customer or any other third party for a defect in the Fjord Mastodon that results in personal injury and/

or economic harm Both companies have also filed motions for judgment on the pleadings, requesting that the court

summarily dismiss both causes of action against Fjord Motors, Inc and Bjorn Fjord Motors, Inc on the basis of the

Chapter 10 Case Hypothetical and Ethical Dilemma

Tommy McCartney is a sixteen-year-old high school student He has worked forty hours per week at the local convenience store over the last year, and has diligently saved $6,000 for the purchase of his first car.

While visiting a local car dealership, Tommy finds the “car of his dreams,” a used yellow Camaro

Tommy walks into the dealership, announces to the dealership owner that he is “ready to buy,”

negotiates $6,000 as the purchase price, and leaves the dealership a proud car owner.

Over the course of the next six months, Tommy drives the Camaro eight thousand miles, wears the

tires thin, dents the left front fender, and regrets his purchase He realizes that in two short years

college will beckon, and he knows that his parents cannot afford to pay for his higher education In

short, he wants his money back.

On a Saturday morning, Tommy returns to the car dealership, walks into the sales office, and hands

the keys to the seller, asking for the return of his $6,000 The dealer chuckles, and then his look

turns stern, saying “Son, I don’t owe you anything You’ve just learned a lesson in the ‘School of

Hard Knocks.’ The car is still yours, and the money is still mine!”

Who will prevail? Is it legal and/or ethical to allow Tommy to escape his contractual obligations?

Contractual Capacity

Definition: Mental ability to understand

rights and obligations established by

contract, with the presumptive ability to

understand how to comply with terms of

agreement

Contractual Capacity

General Rule of Law: Natural persons over

the age of majority (18 in most states) are

presumed to have the full legal capacity to

enter into binding legal contracts

Individuals Who Have Only Limited

Capacity to Contract

• Minors

• Mentally Incapacitated Persons

• Intoxicated Persons

Rules Regarding Minor’s “Contractual Power of

Avoidance”

Disaffirmance (“Power of Avoidance”): Minors’ right, until

reasonable time after reaching age of majority, to

disaffirm/avoid their contracts

• To exercise right, minor need only demonstrate,

through words and/or actions, intent to rescind contract

• Minor must return any consideration received (if still

in minor’s possession/control), regardless of condition

• Even if consideration damaged/destroyed, other

party has no recourse against minor

Exceptions to Minor’s Right to Disaffirm

Contract

• Contract for Necessaries (Definition):

Contracts that supply minor with basic necessities of life

-Examples: food, clothing, shelter, basic medical services

Exceptions to Minor’s Right to Disaffirm

Contract (Continued)

• Ratification (Definition): Acceptance of terms of

contract (entered into as a minor) after reaching

age of majority

-Express Ratification: Occurs when, after reaching age of majority, individual states (either orally or in writing) that he/she intends to

be bound by contract entered into while a minor -Implied Ratification: Occurs when former minor takes action after reaching age of majority

Parental Liability for Minors’ Contracts,

Necessaries, and Torts

• General Rule: Parents not liable for contracts

entered into by their minor children

-Exception: Contracts for necessaries

• General Rule: Parents not liable for torts

committed by their minor children

Individuals Having No Capacity to

Contract

• Those adjudicated insane

• Those adjudicated habitually intoxicated

• Those with appointed legal guardians

Illegal Contracts

• Contracts with no legal purpose and/or subject

matter

-Example: Agreement to commit crime/tort

• Contracts violating statute(s) and/or “public policy”

-Example: Usurious loan agreement (loan

contract exceeding state-imposed maximum

interest rate)

Effect of Illegal Agreement

General Rule: When an agreement is

illegal, the contract is void