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Contracts II
University of Alabama School of Law
Lee, Grace

Contracts II
Lee
Spring 2012
 
 
Do you have a contract?
            Is it indefinite?
            Is it incomplete?
 
Is the contract void or voidable?
            Incapacity
                        Bowling v. Sperry
                        Lucy v. Zehmer
            Mistake
            Fraud
            Duress
            Unconscionability
 
What does the contract mean?
            Parol Evidence Rule
            Interpretation Rules
 
Have the parties acted in good faith under the contract?
 
Are there any warranties, representations, or conditions?
            Yes à Have they all been met?
            If not à have they been waived?
            If neither met nor waived, was there substantial performance?
 
Has performance been rendered impossible or has the purpose of the contract been frustrated?
 
GOALS OF CONTRACT LAW
 
To give the parties what they would have stipulated for expressly if at the time of making the contract they had complete knowledge of the future and the costs of negotiating and adding provisions to the contract had been zero. Market Street
 
Forfeiture should be avoided whenever possible
 
 
AVOIDANCE OF CONTRACTS
 
There are various ways in which a party can avoid legal obligation for promises that seem to satisfy the requirements for contract.
Courts will sometimes refuse to enforce contracts because of conditions existing at the time of contracting, such as a lack of capacity to contract by one of the parties, defects in the bargaining process resulting form mistake, fraud, duress, or unconscionability, or terms in the agreement that make performance illegal or against public policy.
These rules are mandatory in that the contracting parties do not have the freedom to waive these defenses.
 
CAPACITY TO CONTRACT
 
The law generally assumes that all person have the capacity to enter contracts. The two exceptions to this rule are minors and mentally incompetent. Incapacity generally renders the contract voidable, not void. Usually, avoidance of the contract in its entirely is the only appropriate form of relief. Rescission of the contract is accompanied by restitution of any benefit conferred under the contract.
 
 
In considering questions of capacity, the court must balance the conflicting interests of fairness to the minor or compentent and the other party to the party.
 
 
Incapacity is based on the public policy of protecting an incapacitated person from assuming contractual duties to which she was no capable of assenting. Because the incapacitated party’s lack of mental competence means that her apparent assent to the contract is illusory, the policy of freedom of contract is not served by holding a person incapable of assent to a false manifestation of it.
 
No one can be bound by contract who has not legal capacity to incur at least voidable contractual duties. Capacity to contract may be partial and its existence in respect of a particular transaction may depend upon the nature of the transaction or upon other circumstances.
 
Potential Issues
1.      Under what circumstances is a person so incapacitated that either no contract can rise form the bargain (contract void) or a contract which does arise can be rescinded or avoided (contract voidable)?
2.      What must be done to effectively rescind a voidable contract?
3.      What are the appropriate remedies available to both partied involved in the transaction?
 
 
INFANCY
 
Unless a statute provides otherwise, a minor does not have the legal capacity to be bound in in a contract before the age of 18, and the contract is voidable at the minor’s instance. A minor’s incapacity is a purely objective fact, in the sense that it is based solely on the minor’s age, and not on subjective attributes such as intelligence or sophistication.
 
The legal incapacity of a minor is based on the policy of protecting minors form their own immaturity and preventing their exploitation by adults. This also places minors under a disability because sensible and informed people will decline to contract with one who lacks capacity.
 
A voidable contract is not absolutely void, but may be annulled or affirmed at the instance of the party entitled to invoke that election. 
 
The minor may disaffirm it at any time before reaching the age of majority, or within a reasonable time thereafter
 
If the minor has not disaffirmed the contract by the time that he reaches the age of majority, he may ratify it as a majority.
 
Situations in Which a Minor May Incur Liability
There are some situations in which a minor can incur legal liability as a result of entering a contract such as (1) necessaries (2) emancipation (3) misrepresentation of age or (4) statute
 
(1) Necessaries
The term ‘necessaries’ includes the bare necessities as well as whatever goods or services are needed for the minor’s livelihood, or appropriate to his standard of living and position. However, it does not include luxuries.
TEST – The question of what constitutes a necessary is factual and based on all the circumstances
“The question is whether the item was so needed by the minor, in view of his situation in life, his social status, and his financial position, that he could not be maintained properly or suitably without it” Bowling v. Sperry
 
In Bowling, the court did not consider a car to be a necessary even though the minor would have found the car useful as a means of transport to his summer job.
 
Enforcement of a claim for Necessaries
Some courts see a contract for necessaries as

re enough to preclude an adequate degree of assent
 
Factors considered
(1)   The adequacy of consideration
Where a person has some understanding of a particular transaction which is affected by mental illness or defect, the controlling consideration is whether the transaction in its result is one which a reasonably competent person might have made.
(2)   Whether or not the transaction was improvident
Inadequacy of price within itself is not enough. There must be something else besides the mere inadequacy of consideration or inequality of the bargain to justify a court in granting relief by setting aside the contract (e.g., abuse of confidence, suggestion of falsehood, undue influence)
(3)   The relation of trust and confidence between the parties to the transaction and
(The other party’s knowledge or reason to know of the incapacity)
(4)   The weakness of the mind of the alleged incompetent person as judged by all other acts within a reasonable time prior to the subsequent to the act in question
 
When the mental capacity of an adult is concerned, the presumption is in favor of capacity, so that the other party is entitled to rely on apparent capacity unless some other circumstances signal a problem. A court has to be particularly careful that it is truly serving the allegedly incompetent individual’s best interest and not unduly interfering with his contractual liberty.
 
 
Incapacity Induced by Alcohol or Drug Abuse
Courts generally permit avoidance on the group of incapacity if the level of intoxication is sufficient to deprive him of understanding or of the ability to act rationally and the other party had reason to know of this.
TEST – Lucy v. Zehmer
The law imputes to a person an intention corresponding to the reasonable meaning of his words and acts. If his words and acts, judge by a reasonable standard, manifest and intent to agree, it is immaterial what may be the real but unexpressed state of his mind.
 
Why?
If intoxication is severe enough, its impairing effect can be just as profound as mental illness. Furthermore, that degree of inebriation is usually obvious enough to be apparent to the other party, so a strong inference can be drawn that he deliberately took advantage of it.