Chapter 9: Contracts – Consideration, Capacity, and Legality
What is consideration? What is required for consideration to be legally sufficient?In what circumstances might a promise be enforced despite a lack of consideration?
Does a minor have the capacity to enter into an enforceable contract? What does it mean to disaffirm a contract?Under what circumstances will a covenant not to compete be enforceable? When will such covenants not be enforced?
What is an exculpatory clause? In what circumstances might exculpatory clauses be enforced? When will they not be enforced?
Generally, consideration must have:“Legally Sufficient Value”anda “Bargained-for-Exchange.”
Legally Sufficient Value can mean:Promise,Performance, orForbearance.
Bargained-for-Exchange:must provide basis for the bargain.Something of legal value (a promise, or a performance) must be exchanged between the parties.The promise must be either legally detrimental to the promisee,orlegally beneficial to the promisor.
Adequacy of Consideration:Courts typically will not consider.Law does not protect a person from entering into an unwise contract.Cases of “shockingly inadequate consideration” may raise a red flags, and be ruled unconscionable.
Agreements That Lack Consideration.Preexisting Duty.Promise to do what onealreadyhas a legal duty to do does not constitute legally sufficient consideration.Unforeseen Difficulties.Recession and New Contract.
Agreements That Lack Consideration.Past Consideration:no consideration because the bargained-for exchange element is missing.
Agreements That Lack Consideration.Illusory Promises: promisor has not definitely promised to perform because consideration is lacking, and unenforceable.
Settlement of Claims.Accord and Satisfaction.Settlement for lessor amount; debt must be in dispute.Liquidated Debts: debt is certain, accord and satisfaction cannot occur.Unliquidated Debts: amount not settled.
Settlement of Claims.Release: Good faith, signed writing, consideration.Covenant Not to Sue: does not always bar further recovery.
Promissory Estoppel (“detrimental reliance”):Doctrine applies when a person relies on the promise of another to her legal detriment.Promisor is “estopped” (precluded) from revoking the promise.
Promissory Estoppel. Elements:Must be definite promise.Promisee must justifiably rely on the promise.Reliance is substantial.Justice will be served by enforcing promise.
Promissory Estoppel.Application of the Doctrine.CASE 9.1 Harvey v. Dow (2011).What actions or words did Teresa rely on to her legal detriment?
Minors:at 18 years, a person is emancipated, and has the legal capacity to enter into any contract that an adult can.However, a contract entered into by a minor isvoidableat the option of that minor, and can be disaffirmed.
Minors.Disaffirmance.A contract can be disaffirmed at any time during minority, or for a reasonable period after minor is emancipated.Minor must disaffirm the entire contract. Disaffirmance can be expressed or implied.
Minors.Ratification: when minor reaches the age of majority, he can ratify a contract created while minor.Parents’ Liability: generally, parents are not liable for minors, except for necessaries.
Intoxication.Lack of capacityat the timethe contract is being made. Contract is either voidable or valid, depending on circumstances.Disaffirmance (voidable).Ratification: after ‘sobering up.
Mental Incompetence.Void: person is adjudged mentally incompetent by a court of law and a guardian has been appointed.
Mental Incompetence (cont’d).Voidable: person does not know she is entering into the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences.
Mental Incompetence (cont’d).Valid: when person is able to understand the nature and effect of entering into a contract but may lack capacity to engage in other activities (known as “lucid” intervals).
A contract must be formed for a legal purpose.A specific clause in contract can be illegal, but rest of contract can be enforceable.Contract to commit a tortious act is illegal.
Contracts Contrary to Statute.A contract must be formed for a legal purpose.A specific clause in contract can be illegal, but rest of contract can be enforceable.A contract to commit a tortious act is illegal.
Contracts Contrary to Statute.Any contract prohibited by federal or state statutory law is illegal and thereforevoid(never existed).Contracts to Commit a Crime.Contracts for Usury.
Contracts Contrary to Statute.Gambling:distribution of property based on chance among persons who have paid valuable consideration.Licensing Statutes: contract’s enforceability depends on purpose.CASE 9.2 Sturdza v. United Arab Emirates (2011).Do you think this decision was fair?
Contracts Contrary to Public Policy.Contracts contrary to public policy are void.Contracts in Restraint of Trade are generallyvoid.Exception: Covenant not to Compete and Sale of an Ongoing Business.Exception: Covenant Not to Compete in Employment.
Unconscionable Contracts or Clauses.Procedural Unconscionability: inconspicuous print or legalese.Depends on a party’s lack of knowledge or expertise.Substantive Unconscionability.Contracts are oppressive or overly harsh; that deny a remedy for nonperformance.
Unconscionable Contracts or Clauses.Substantive Unconscionability.CASE 9.3 Lhotka v. Geographic Expeditions, Inc. (2010).Why was the arbitration clause unenforceable?
Exculpatory Clauses.Release a party from liability in the event of monetary or physical injury – no matter who is at fault.Enforceable when they are not against public policy, are not ambiguous, and do not shield parties from intentional conduct.
The Effect of Illegality.Generally, an illegal contract is void.Both parties are considered to be at fault, and neither party has any rights or duties.Courts are not generally concerned about unjust enrichment in an illegal contract.
The Effect of Illegality.Justifiable Ignorance of the Facts.If one party is ‘innocent’, she can recover if there has been unjust enrichment.Likewise, if an innocent party has fully performed, courts may enforce the contract against the other party.
The Effect of Illegality.Members of Protected Classes.When a statute protects a certain class of people, a member of that class can enforce the contract, even though the other party cannot.
The Effect of Illegality.Withdrawal from an Illegal Agreement.If the contract is executory, a party can withdraw from the contract, and recover the performance or its value.
The Effect of Illegality.Severable, or Divisible, Contracts.Distinct parts that can be performed separately, with separate consideration for each part.Fraud, Duress, or Undue Influence.Party to an illegal contract may be able to recover if wrongfully induced.