Chapter 11 Elements Required for a Contract Formation

Chapter 11          Elements Required for a Contract Formation o Agreement (Offer and Acceptance) o Consideration (Bargained-For Exchange) o Contractual Capacity (Legal Ability to Enter Into Binding Contract) o Legal Object Contractual Capacity o Mental ability to understand rights and obligations established by contract, with the presumptive ability to understand how to comply with terms of agreement o General Rule of Law:  Natural persons overs 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 o Minors o Mentally Incapacitated Persons  Excluding those who have been adjudicated to be incapacitated, which are addressed separately) o Intoxicated Person o **These contracts are “voidable” rather than “void” Rules Regarding Minor’s “Contractual Power of Avoidance” o 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 – this is called the duty of “restoration”  Even if consideration damaged/destroyed, other party has no recourse against minor (except in some states which modify this rule to require “restitution,” which in some of those states may only be required if the minor acted intentionally or recklessly or fraudulently represented age)  Rules designed to discourage competent parties from entering into contracts with minors  ** It is irrelevant whether the minor actually had the capacity (knowledge, sophistication, and experience) to contract Exceptions to Minor’s Right to Disaffirm Contract o Contract for Necessaries (Definition): Contracts that supply minor with basic necessities of life  Food, clothing, shelter, basic medical services o 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 intended 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 ratify contract Parental Liability for Minors’ Contracts, Necessaries, and Torts o General Rule: parent no liable for contracts entered into by their minor children o Exception to the rules is contracts for necessaries of life (premised upon the parent’s duty to supply necessaries) o Parental liability would not extent to contracts for necessaries if the minor has become emancipated (which means the minor has voluntarily left the home and no longer lives with his or her parents) Rules Regarding Incapacitated and Intoxicated Person’s “Contractual Power of Avoidance” o Disaffirmance (“Power of Avoidance”): person’s right, until reasonable time after recovered from the limitation of capacity, to disaffirm/avoid their contracts  To exercise right, person need only demonstrate, through words and/or actions, intent to rescind contract  Ratification occurs if no disaffirmance occurs during the required period  Person must not only return any consideration received, but must also make restitution (meaning pay for any damages or put the parties in the same position they were in prior to the contract) Individuals Having No Capacity to Contract o Those adjudicated insane o These contracts are void (as opposed to voidable) Illegal Contracts o Contracts with no legal purpose and/or subject matter  Agreement to commit crime/tort o Contracts violating statues(s) and/or “public policy”  Usurious loan agreement (loan contract exceeding state-imposed maximum interest rate)  Unconscionable contract (agreement so unfair that it “void of conscience”) Restraints on trade (in some states, covenants not to compete are considered against “public policy”)  Contract to perform a service which the performing party has no license to perform Procedural Versus Substantive Unconscionability o Procedural  Related to conditions that would impair one party’s understanding of a contract/contract terms  Adhesion contract (contract created by a party and presented to other party on a “take-it-or-leave-it” basis or contracts where terms are hidden or difficult to read o Substantive  Involves overly harsh or lopsided substance in a contract that usually results from unequal bargaining power  Contract in which one party has little to no legal recourse if the other breaches the contract Effect of Illegal Agreement o General Rule: when an agreement is illegal, the contract is void (opposed to voidable) o Exception: when that would harm an innocent party who was justifiably ignorant of the law  In some states, the customer can enforce a contract for a service for which the other party is not licensed to perform the service if that customer would otherwise be harmed by the inability to enforce the contract   