CONTRACTS UNIT 3

1. CONTRACTS UNIT 3 Capacity and Legality

2. Capacity Intoxicated Persons • Sufficiently intoxicated to lack mental capacity; i.e. intoxication impaired reason and judgment so severely that the person did not comprehend the legal consequences of entering into the contract. • The intoxicated person must be able to return the consideration received

3. Capacity Mentally Incompetent Persons • Can be void, voidable or valid, depending on the circumstances. • If a court has declared a person to be mentally incompetent, a contract made by that person is simply void…no contract exists • If a court has not declared the person incompetent, but the person was in fact unable to understand the nature, purpose or consequences of his contract, then the contract is voidable. The person will have to return the consideration received, however. • A mentally incompetent person can make a valid contract if at the time the contract was formed, the person had the capacity to make a contract. Sometimes called a lucid interval.

4. Legality • To be enforceable, a contract must have a lawful end or purpose. A contract to do something that violates law or public policy will have enforceability issues. • It may or may not be void; it may be voidable by either party. Some may be enforceable, though penalties may attach.

5. Legality Some Common Areas of Contract Illegality are: • Gambling • Usury • Licensing Statutes • Blue Laws; Sunday Laws • Public Policy

6. Legality Al, Beth, Cathy, Don and Ed all worked together in a Waffle House in Alabama. A regular customer who frequently traveled to Florida often brought them Florida lottery tickets from time to time. They all agreed to split any winnings that any of them might have on these tickets. One of the tickets, Cathy’s, is a $10 million winner, but Cathy seems to have forgotten about their agreement. Al, Beth, Don an Ed sue her for a share of the loot. Are they likely to be successful?

7. Legality In Dickerson v. Deno, the court held that this contract was “an exchange of promises to share winnings from the parties’ individually owned lottery tickets upon the happening of an uncertain event” meaning that this was “a contract founded on a gambling consideration.” Gambling in Alabama is illegal, and thus the contract was void.

8. Legality Al agrees to loan Bob $10,000. Bob is seriously desperate, and agrees to pay Al an interest rate of 48% per year on the loan. Applicable state usury law provides that the highest lawful rate of interest is 24%, and prescribes penalties for violations. Enforcement issues here are what? Generally, the statutory penalties apply. They may involve a forfeiture by Bob of some or all the interest and some or all of his principal; they may also require him to pay penalties or attorneys’ fees. In any event, the loan won’t be enforced as originally written.

9. Legality Contracts with Unlicensed Person may or may not be enforced. Depends upon the type of licensing statute that’s been violated: • Regulatory – these licensing statutes are designed to protect the public from unskilled or unqualified practitioners, such as medical providers, accountants, pest control applicators, etc. • Revenue Raising – these are primarily designed to raise revenue; they are more like a tax and don’t really impose any particular qualification or skill requirements on licensed persons.

10. Legality Mickey is a bartender. The state requires him to maintain a license, but doesn’t require that he pass a test or take a course of any kind – only requires him to be 21. Gerald is 20. He’s an adult for most purposes, but he’s not to be served alcohol. Gerald runs up a big tab in Mickey’s bar. Mickey demands payment. Gerald counters that because Mickey doesn’t have a license and Gerald’s underage, the contract is not enforceable. IS IT? Probably enforceable; Gerald will have to pay his bar tab. Gerald may have committed a criminal offense, however.

11. Legality The bartender licensing statute is probably not regulatory. It doesn’t require anything other than that Mickey be 21. Where statute is not regulatory, the courts generally don’t void contracts with unlicensed persons, though they may sanction those persons who violated the statute by not obtaining a license. On the other hand, where the statute is regulatory, contracts made with unlicensed persons are generally illegal and unenforceable. Also many times the statutes themselves provide that the agreements can’t be enforced.

12. Legality Out of work, about to lose his home, and desperate for money, Larry decided to sell the youngest of his 3 children through a videotaped ad to show to potential purchasers. A babysitter alerted police, who set up a sting operation. Larry accepted a $10,000 down payment on a $60,000 contract. Larry was arrested, but at th time there was no state statute outlawing what Larry tried to do (there sure is one now). What if this had been a contract? Enforceable? No state law was violated. Does that matter? No – Clearly this is against public policy. No way this contract would have been enforced.

13. Legality Old man Everett is aware that Rhett Butlerand his daughter are becoming quite an “item,” as they are showing up weekly in the local newspaper’s social columnist’s description of fancy parties held around town. Thinking Mr. Butler to be a scoundrel and a gold-digger, he offers to pay Mr. Butler $10,000 if he’ll agree not to marry his daughter. Mr. Butler, professing his love, marries the daughter and Everett sues him. Can he win? Why? Public policy favors marriage, and an agreement prohibiting marriage is contrary to that policy.

14. Legality Mr. and Mrs. Jones agreed to purchase a freezer for $900 from a door to door salesman. With taxes and financing charges, the total came to $1,234.80. The same freezer is available at a store for $300. After having made payments of over $600, the Jones’ sued, seeking a declaration that the contract was not enforceable. Any luck? Actually, yes. Ordinarily a court won’t look beyond the bargain struck by the parties. However, sometimes they are so oppressive that the courts will intervene, on the grounds that the contract is unconscionable.

15. Legality Unconscionability can be of two kinds: • Procedural. This has to do with how the contract came to be. Things like extremely unequal bargaining power; overly complicated contract documents; adhesion contracts. • Substantive. This has to do with terms that are just overly oppressive or harsh. Tremendous disparities in value changing hands. Which of these did we have in the prior example with the Jones? Procedural or Substantive?

16. Legality Crusher Mfg. makes its laborers sign off a document before they get their first paycheck. It says: In consideration of my continued employment by Crusher, I agree to be responsible for any injury that may occur to me, no matter what, and I will never hold Crusher liable for anything that may happen at the factory, regardless of whose fault, and even if due to defective machinery or negligence or misconduct of myself or some other employee. DO YOU THINK THEY CAN ENFORCE THIS? WHY? This is known as an “exculpatory” clause. Sometimes in an effort to avoid liability, a party will go so far as to create an unconscionable shifting of risk. This is easier to find in some contexts than in others.

17. Legality The Kansas attorney general was concerned about out-of-state physicians who offered to contract with Kansas residents to prescribe medications for them over the internet. He sued to stop them, claiming these contracts were unconscionable and therefore against public policy. Think he got anywhere with this?

18. Legality The court said it couldn’t find any evidence that the doctors had deceived, oppressed, or misused superior bargaining power. The patients were advised how the deal was going to work on the website, they consented to it, and they got exactly what they bargained for. The contracts were not unconscionable.

19. Legality Nabisco and Keebler agree with one another that each will keep the price of their saltine crackers at $3.99 a package or more. Anything wrong with this? Yes, lots. It’s called price-fixing, and it’s a federal felony. Why is this bad, though? Because it is anti-competitive. Agreements like this have an anti-competitive effect and are therefore against public policy and unenforceable. This one is not just against public policy, it’s illegal per se. It has criminal implications.

20. Legality Victoria OilwellSupply (VOS) is owned by Cooter, and has been in business for 25 years, selling oilfield supplies throughout Texas. Compare: • VOS sells its assets and business to Newcomer Supply. As a part of the deal, VOS and Cooter agree not to engage in the sale of oilfield supplies anyplace in Texas for 5 years. • VOS’s salespeople (who are “at will” employees) all sign agreements with Newcomer that, if they cease to work for Newcomer, they won’t go to work for any competitor in South Texas during the 3 years after their employment terminates

21. Legality Questions: • Don’t both affect competition and restrain trade? • Does one do so more than the other? • Which do you think is more likely to be enforceable? Why? Contracts in restraint of trade are against public policy and not enforceable unless they are reasonable. Usually, this means that they are tied to another valid agreement (said to be “ancillary” to that other agreement).

22. Legality In these examples, both are connected to other agreements. • Why is it reasonable to have a non-compete in connection with the sale of a business? • Why is it reasonable to have a non-compete in connection with an employment relationship?

23. Legality The non-compete in connection with the sale of the business is likely to be enforced to protect the “goodwill” or the “going-concern value” of the business being sold. If Cooter or VOS could set up shop next door and keep their old customers, then they would not have transferred that goodwill to Newcomer. OK, now think about the employment situation. Is it any different? One thing is that the employees are at will employees. What did we say about the consideration in an at will employment situation?

24. Legality • Remember? It’s illusory – it doesn’t really bind the employer (or the employee). So first, there is the question of whether the non-compete is really connected to another valid agreement. • Courts are uncomfortable enforcing an agreement against the employee, when the employer doesn’t really make any commitment. The employer has the right to end the employment, then hold the employee to the non-compete. Seems like a kind of one-way street. • In Texas, courts require some specific consideration flowing from the employer to the employee…in other words, something to guarantee that the employer has some skin in the game. More than an illusory promise of future employment. But a lot less than they used to require!

25. Legality • Texas has stringent requirements for what that consideration must be. It must somehow support the need for the non-compete. • Courts have held that when the employer makes a non-illusory and enforceable promise to provide the employee with things like specialized training or access to trade secrets or proprietary methods, it becomes reasonable to use a non-compete to protect that investment or that information. • However, the employer must bind itself to provide these things, and not be able to avoid providing them by terminating at will. Can’t be illusory. • Finally, in the employment context, the time and geographic elements have to be no greater than required to protect those legitimate interests of the employer.

26. Effect of Illegality General Rule: Contract won’t be enforced • Courts won’t aid either party; let the chips fall where they may. If the contract is executory, neither party can enforce it; if it is executed, there’s no recovery. Unjust enrichment is not a concern. • Policy behind this is to provide a deterrent. Remove the predictability so that parties won’t contract in violation of the law. • There are exceptions…of course!

27. Effect of Illegality Ted Trucker contracts to ship a box to the Port of Victoria for his regular charge of $500. Ted didn’t know it, but it turned out the box is packed with contraband, the transportation of which was illegal. This is one exception to the general rule: Justifiable Ignorance. Ted can probably still collect his fee, if he was justifiably ignorant of the box’s contents.

28. Effect of Illegality Ted Trucker works for a trucking company. Against state law, it requires its truck drivers to drive more than a set number of hours per day. Would the courts enforce Ted’s claim for payment for the entire number of hours he actually drove, even though it was an illegal amount? Sure…this is another exception – Ted’s a member of the protected class, the people who are benefited by the statute that is violated.

29. Effect of Illegality Ted and Bob decide to place an illegal bet on the first game of the Red Sox and Rockies World Series. They each put up $100 with Mary. Before the game, can Ted withdraw? Yes, the illegality isn’t complete until the bet is paid. Until then, a party can generally withdraw from an illegal contract and the courts will enforce that withdrawal.

30. Effect of Illegality An employment contract contains a non-compete that is clearly unreasonable – requires the employee not to work for a competitor anywhere in the galaxy for the entire remainder of time. But, the contract has this language in it: The determination that one or more provisions of this agreement is invalid, void, illegal or unenforceable shall not affect or invalidate any other provision of this agreement. Another exception: This is called a severability clause; they are generally enforceable. The rest of the employment contract may be enforced even if the non-compete part is not.

31. Contracts - Unit 4 Assent, Form, Third Party Rights, Discharge, Breach and Remedies

32. Genuineness of Assent MISTAKES Only certain mistakes have significance • Not a “bad bargain” (e.g. a mistake as to market conditions or market value) but mistaken assumptions regarding contract formation; a mistake of fact.

33. Genuineness of Assent Adler contracts to buy 30 acres from Capers because he believes that he can sell it at a profit to Brennan. Adler closes on the land, buying it for $4,000 per acre. However, try as me might, he can’t get an offer from Brennan for more than $3,000 per acre. Can Adler undo the sale and get his money back from Capers? No, this is a mistake as to market value. Adler is stuck with the deal that he made.

34. Genuineness of Assent What if Adler had contracted to buy the land, but found out before he closed that he was not going to be able to sell to Brennan? Would that make any difference? No, it would still be a mistake as to market value or conditions and the courts won’ t normally provide relief for these kind of mistakes

35. Genuineness of Assent Adler buys a painting from Brennan that both he and Brennan believe to be a Renoir, and very valuable. Adler pays $2 million for it. However, it turns out to be a very clever fake by Larry Slotnick, an art forger. Can Adler avoid the contract and get his $2 million back? Yes. Both parties were under the assumption that the painting was something that it was not; they all thought is was a valuable Renior, not a worthless Slotnick.

36. Genuineness of Assent Unilateral and Bilateral Mistakes Adler intends to sell his tractor for $17,500. When he hears that Brennan is looking for a tractor, he sends him a letter offering to sell Brennan his tractor, but he mistakenly types in “$15,700” as the price. Brennan accepts. Can Adler get relief? No, generally, a mistake of fact by one party is not enough to prevent contract formation. Would the same result happen if the price stated in the letter was “$1,570”?

37. Genuineness of Assent Adler could probably avoid the bargain in this situation, since Brennan should have known that the letter was a mistake. It’s not reasonable that Adler would sell the tractor for that little. What if the deal were for a tractor, shredder, post hole digger and other attachments, and all were listed in the letter like this:

38. Genuineness of Assent Tractor $13,000 Shredder $ 2,000 Post Hole Auger $ 1,000 Rake $ 500 Disc plow $ 500 Round Bale Spike $ 500 TOTAL $16,000 Again, Adler would have relief, since there is clearly a math error. The total should be $17,500. Brennan should have noticed it and realized that Adler did not mean to sell for the mistaken amount.

39. Genuineness of Assent Raffles v. Wichelhaus Wichelhaus contracted to buy a boat load of Indian cotton from Raffles. The shipment was to arrive on the Peerless, sailing from Bombay, India, according to the contract between them. When the ship arrived with the cotton Raffles had shipped, Wichelhaus didn’t accept it, saying that Raffles was late with his shipment. Wichelhaus contended that the ship had already arrived, and it did not have his cotton on it. So he got the cotton he needed elsewhere.

40. Genuineness of Assent Raffles said, “Hey, I shipped the cotton per the agreement…I sent it on the Peerless which sailed from Bombay in December!” Wichelhaus replied “I meant that I wanted the cotton to be on board the Peerless that sailed from Bombay two months earlier, in October!” In fact, there were two ships that sailed from Bombay, both named Peerless…one sailed in October and the other in December. The contract did not specify which of the two ships the cotton was to be aboard.

41. Genuineness of Assent Court held that when the second ship named Peerless sailed, a “latent ambiguity” arose, that prevented both parties from being in consensus as to the meaning of their agreement. Not a mistake as to market value or conditions, but as to a material fact – which ship was to deliver the cotton. There was no meeting of the minds, no mutual assent. No contract. What if the contract specifically called for delivery on the Peerless sailing in October, but Raffles mistakenly shipped it on the boat sailing in December? This would have been a unilateral mistake. The court would enforce the contract as written.

42. Genuineness of Assent Contract can be rescinded by either party Bilateral Mistake Material Mistake Of Fact Contract enforceable unless: Other party knew or should have known of mistake Mistake was due to clear math error, inadvertent and w/out gross negligence Unilateral Mistake

43. Genuineness of Assent Adler is selling his house to Brennan. Brennan asks if the plumbing is of a certain type, and makes it clear that he’s only interested in buying if this is the kind of plumbing that’s installed. Adler knows it’s not that kind of plumbing, but he tells Brennan that it is, anyway. Brennan finds out before closing. Can Brennan rescind the contract? Sure. A Fraudulent Misrepresentation is another way that a meeting of the minds can be prevented. Here, Brennan did not voluntarily agree to buy this house due to Adler’s fraud.What does fraud require, though?

44. Genuineness of Assent Fraud requires: • A material misrepresentation • Intent to deceive • Justifiable reliance • If not for recission only, proof of damages

45. Genuineness of Assent Same deal – Adler is trying to sell his house to Brennan, who’s particular about the plumbing. This time, Adler doesn’t know anything about the plumbing, but he nevertheless tells Brennan that it has the kind of plumbing that Brennan wants. What result now? Depends. There’s a misrepresentation, looks like there’s justifiable reliance, question is whether there is INTENT TO DECEIVE. Is there SCIENTER here? What if Adler thought the plumbing was of the right kind but was just wrong about it?

46. Genuineness of Assent What’s the difference between: Used car dealer telling you that “this 1970 Cadillac will get 63 miles per gallon.” Your lawyer telling you that if you get a particular agreement signed, “it will create a debt in your favor.”

47. Genuineness of Assent Is it more reasonable to believe one or the other? You are more justified in relying on one of these statements than you are on the other one. For there to be a fraudulent misrepresentation that prevents formation of a contract, you must justifiably rely on the misrepresentation.

48. Genuineness of Assent Adler is elderly. Brennan is his daughter. She lives in the same town as he, and she takes care of him. His other daughter, Connor, lives out of state. Adler has always treated his girls equally, or tried to. As Adler ages, Brennan begins to work on him, suggesting that Connor lives away because she’s selfish and doesn’t love Adler, while she, Brennan, is caring and faithful and would never leave him. Eventually, Adler agrees to deed Brennan the ranch, the family’s main asset. After making the agreement, Adler comes to his senses. Can he avoid the agreement?

49. Genuineness of Assent Yes, if it can be shown that Brennan exercised undue influence over him. This is such influence that it overcomes his normal level of understanding, and leads him to do something he would not ordinarily do.

50. Genuineness of Assent IRS assesses a huge tax and penalty on Adler. Adler hires Brennan, and expert lawyer on tax matters to represent him and resist the assessment. Two days before the hearing (too late to get somebody else up to speed), Brennan refuses to represent Adler unless Adler doubles his already exorbitant fee. Adler has no choice, but later sues for damages. Successful? Why? Brennan secured the amendment by DURESS. Prevented a meeting of the minds. No assent