Dynamic business law 4e kubasek 4e CH16

• LO16-1: What is the legal effect of a lack of capacity on a person's ability to enter into a contract?. Chapter 16 Hypothetical Case 1• As this chapter indicates, usury occurs when a

Chapter 16

Capacity and Legality

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McGraw-Hill Education.

• LO16-1: What is the legal effect of a lack of

capacity on a person's ability to enter into

a contract?

a party have limited capacity to enter into

a contract?

• LO16-3: What is the legal effect of entering

into a contract for an illegal purpose?

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Chapter 16 Hypothetical Case 1

• As this chapter indicates, usury occurs when a party

gives a loan at an interest rate exceeding the legal

maximum, and statutes prohibiting usury have been

enacted in virtually every state The legal maximum

interest rate varies from state to state.

• Should the government regulate the maximum interest

rate charged by lenders to borrowers, or should the

free market dictate the interest rate charged? Without

a usury cap in place, would it be ethical for a lender to

charge whatever level of interest a borrower would be

willing to pay?

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Chapter 16 Hypothetical Case 2

• Before her recent accident, 82-year-old Imogen 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, Ledbetter decided to purchase a new automobile Although her 50-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, Ledbetter 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, Ledbetter 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 Ledbetter crashed into a culvert She

sustained severe injuries, including (but not limited to) a broken left leg, a broken

pelvis, a collapsed lung, and numerous lacerations to her face Her attending

Chapter 16 Hypothetical Case 2

(cont'd)

• Ledbetter 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 the 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 contract's exculpatory clause.

• Should the court grant the defendants' requests for judgment on the

pleadings? Is the exculpatory clause enforceable against Imogen Ledbetter?

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Contractual Capacity

• Definition:

• Mental ability to understand rights and obligations established by

contract, with the presumptive ability to understand how to

comply with the terms of the agreement

• 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

• Those who have limited capacity to contract:

• Minors

• Those suffering from mental deficiency that renders them

incapable of understanding the nature and obligations of

contracts

Rules of Minor's Contractual

Power of Disaffirmance

• Disaffirmance: 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

• Rules designed to discourage competent parties from entering

into contracts with minors

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Exceptions to Minor's Right to

Disaffirm Contract

• Contract for necessaries: Contracts that supply minor

with basic necessities of life

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

• Ratification: 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 consistent with intent to

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

• Exception: Failure to properly supervise child,

subjecting others to unreasonable risk of harm

Individuals Having No

Capacity to Contract

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Rules Regarding Intoxication

• General rule: Contracts made by intoxicated

persons are voidable

• If intoxication merely causes person to exercise

poor judgment, contract not voidable unless other

party unfairly capitalized on the impaired

judgment

• When intoxicated person becomes sober, contract

can be ratified or disaffirmed; however, courts will

liberally interpret behavior that seems likes

ratification once intoxicated person becomes sober

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Illegal Contracts

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)

• Example: Unconscionable contract (agreement

so unfair that it is void of conscience)

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Chapter 16 Hypothetical Case 3

• Tom McCartney is a 16-year-old high school student He has worked 40 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, McCartney finds the car of his dreams, a used yellow Camaro

McCartney 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, McCartney drives the Camaro 8,000 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, McCartney 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 at 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 McCartney to escape his contractual

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Chapter 16 Hypothetical Case 4

• Molly McIntosh and her husband, Doug Amundsen, recently took a long-awaited

trip to Las Vegas One evening, they both got very intoxicated and decided, on a

lark, to look at time-share apartments Sure enough, four hours later, they

walked out of the time-share office with a contract announcing their ownership

(well, part ownership) of a time-share property.

The next morning, McIntosh and Amundsen woke up with no memory of the

prior evening's events They packed their bags and traveled home.

One week later, McIntosh discovered the contract tucked in a pocket in her

purse Horrified, McIntosh and Amundsen immediately contacted the office and

demanded that they cancel the contract The representative they spoke with

chuckled and told them that the deadline for the normal cancellation period for

a time-share contract—five days in Nevada—had come and gone.

• Did McIntosh and Amundsen have capacity to contract at the time they agreed

to buy the property?

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