BLTC 11e SM-Ch13 - NACM



Chapter 13Capacity and LegalityAnswers to Learning Objectives/Learning Objectives Check Questionsat the Beginning and the End of the ChapterNote that your students can find the answers to the even-numbered Learning Objectives Check questions in Appendix E at the end of the text. We repeat these answers here as a convenience to you.1A.Does a minor have the capacity to enter into an enforceable contract? What does it mean to disaffirm a contract? A minor can enter into any contract that an adult can enter into, except a contract prohibited by law for minors. Generally, a contract entered into by a minor is voidable at the minor’s option. Disaffirmance is the legal avoidance, or setting aside, of a contractual obligation. The minor can disaffirm the contract by indicating an intent not be bound to it.2A.Does an intoxicated person have the capacity to enter into an enforceable contract? If a person who is sufficiently intoxicated to lack mental capacity enters into a contract, the contract is voidable at the option of that person. It must be proved that the person’s reason and judgment were impaired to the extent that he or she did not comprehend the legal consequences of entering into the contract.3A.Under what circumstances will a covenant not to compete be enforced? When will such covenants not be enforced? A covenant not to compete can be enforced:1.If it is ancillary (secondary) to an agreement to sell an ongoing business, thus enabling the seller to sell, and the purchaser to buy, the goodwill and reputation of the business.2.If it is contained in an employment contract and is reasonable in terms of time and geographic area.A covenant not to compete will be unenforceable if it does not protect a legitimate business interest or is broader than necessary to protect a legitimate interest. This is because such a covenant would unreasonably restrain trade and be contrary to public policy.4A.What is an exculpatory clause? In what circumstances might exculpatory clauses be enforced? When will they not be enforced? An exculpatory clause releases a party from liability in the event of monetary or physical injury, no matter who is at fault. An exculpatory clause may be enforced if a party seeking its enforcement is not involved in a business considered important to the public interest. An exculpatory clause will not be enforced if a party seeking its enforcement is involved in a business that is important to the public interest.Answers to Critical Thinking Questionsin the CasesCase 13.1—Critical Thinking—Legal ConsiderationCould PAK Foods successfully contend that S.L.’s minority does not bar enforcement of the arbitration agreement because medical expenses are necessaries? Discuss. No, PAK Foods could not succeed in contending that S.L.'s minority does not bar enforcement of the arbitration agreement because medical expenses are necessaries. Of course, minors may be held liable on a contract to furnish necessaries. And necessaries are generally considered to be items like food, lodging, clothing, medicine, and medical attention, and may include attorney's fees in some circumstances. But the contract at issue in the PAK Foods case concerns a minor's employment and the resolution of disputes arising during that employment—the contact is not for the provision of necessaries.Case 13.2—What If the Facts Were Different?Suppose that instead of a nonsolicitation or noncompete agreement, Johnson had been asked to sign a covenant prohibiting her from disclosing Brown’s confidential information or using it for her own purposes. Would the result have been different? Explain. Yes, if Johnson had been asked to sign a covenant prohibiting her from disclosing Brown’s confidential information or using it for her own purposes, instead of a non-solicitation or non-compete agreement, the result in this case would likely have been different.This depends of course on the nature of the information that Brown might seek to protect—lists of customers’ names and addresses, for example, might not qualify, but details of clients’ insurance coverage, including risks, policies, and premiums, might. When the information that an employer seeks to protect is confidential or amounts to trade secrets, and a confidentiality covenant is necessary to protect the employer’s legitimate business interests, it will likely be enforced. The only question would be whether the employee violated the covenant or misappropriated any trade secrets.Case 13.3—Critical Thinking—Social ConsiderationAt the time Holmes had signed the release, KSDK had not yet become a sponsor of the event. Should this fact have rendered the clause unenforceable? Explain. No. At the time that Holmes signed the release, KSDK had not yet become a sponsor of the event, but that fact did not make the clause unenforceable. As the court stated in its opinion, the release of “any Event sponsors” clearly released all sponsors without exclusion. The release is not ambiguous because it does not specifically indicate that it applies to sponsors who had not signed a sponsorship agreement at the time the release was executed.In this case, the exculpatory clause was a release of claims for any injury or accident “that may occur during my participation in this Event or while on the premises of this Event.” Thus, the clause specifically governed liability for injuries or accidents arising out of a participant's participation in and presence at the event. The clause released “any Event sponsors.” KSDK was a sponsor of the event. The release of “any Event sponsors” plainly released all sponsors without exclusion. This plain language cannot reasonably be interpreted to release only those sponsors who had signed a sponsorship agreement before a participant signed the releaseAnswers to Questions in the Reviewing Featureat the End of the Chapter1A.CapacityBeaver did not have the capacity to enter into a contract whether or not it included an exculpatory clause because she was a minor, or, more accurately, she could enter into the contract but she could opt to disaffirm it. Her parents were not minors, however, and could be held to their contracts, including the contract at issue in this problem if it otherwise meets all of the legal requirements.2A.Disaffirmance or ratificationTo disaffirm a contract, a minor must express an intent by words or conduct not to be bound. Here, the filing of a suit would certainly indicate an intent not to be bound. If Beaver had reached the age of eighteen a reasonable time before attempting to disaffirm, however, she could be held to have impliedly ratified the contract.3A.Age of majorityBeaver’s misrepresentation of age would not usually affect her right to disaffirm the contract, but in some states, the opposite is true—she would be bound to the clause.Answer to Debate This Question in the Reviewing Featureat the End of the ChapterAfter agreeing to an exculpatory clause or purchasing some item, such as an iPad, a minor often seeks to avoid the contract. ?Today’s minors are far from na?ve and should not be allowed to avoid their contractual obligations. Today, teenagers, and most certainly, those just under the age of majority, are exposed to what is happening in the business world on a constant basis because of the ubiquity of media outlets—at home, at school, and everywhere there is a Wi-Fi connection. ?When a minor avoids an otherwise valid contract, the seller of the good or service involved gets stuck “holding the bag” while the minor had free (or at least cheap) use of the good in question.? Few minors enter into contracts without understanding to what they are agreeing.As much as we wish to impute adult capacities to minors, they are still minors and are not so capable as adults in understanding the contracts into which they may voluntarily enter.? Consequently, the courts are acting in a just manner when they allow minors to avoid contracts made for the purchase of goods or services.? If all minors were held to their contractual obligations as if they were adults, adults would be more likely to take advantage of minors’ inexperience.Answers to Issue Spottersat the End of the Chapter1A.Cedric, a minor, enters into a contract with Diane. How might Cedric effectively ratify this contract? A minor may effectively ratify a contract after he or she reaches the age of majority either expressly or impliedly. Failing to disaffirm an otherwise enforceable contract within a reasonable time after reaching the age of majority would also effectively ratify it. Nothing a minor does before attaining majority, however, will ratify a contract.2A.Sun Airlines, Inc., prints on its tickets that it is not liable for any injury to a passenger caused by the airline’s negligence. If the cause of an accident is found to be the airline’s negligence, can it use the clause as a defense to liability? Why or why not? No. Generally, an exculpatory clause (a clause attempting to absolve parties of negligence or other wrongs) is not enforced if the party seeking its enforcement is involved in a business that is important to the public as a matter of practical necessity, such as an airline. Because of the essential nature of such services, the parties have an advantage in bargaining strength and could insist that anyone contracting for its services agree not to hold it liable.Answers to Questions and Case Problemsat the End of the ChapterBusiness Scenarios and Case Problems13–1A.Contracts by minorsA contract for shelter for a minor can be classified as a necessary if the contract meets three criteria: (a) the item contracted for is absolutely necessary for the minor’s existence, (b) the item contracted for is within the station (including financial) of life the minor is accustomed to, and (c) the minor is not under the care of a parent or guardian who is required to supply these necessaries. When these three criteria are met, minors can disaffirm their contractual liability, although they continue to be liable for the reasonable value of any contractedfor item based on use. In this case, Kalen made a contract for shelter, which appears to be of a type suitable for his station in life. He is selfsupporting, having removed himself from the care of his parents. The lease is a contract for a necessity, and, although Kalen can disaffirm the lease contract, he is liable in quasi contract for the reasonable value based on use. Thus, the landlord can keep the four months’ rent paid by Kalen (assuming that $450 per month is a fair market value), but the landlord cannot hold Kalen liable for the balance on the lease.13–2A. IntoxicationKira is right and will prevail over Charlotte if Kira can prove that she was indeed intoxicated at the time she sold the necklace to Charlotte. Most likely, Kira will have little difficulty proving this because no reasonable person would sell a valuable necklace for only one hundred dollars. The fact that Kira did so strongly suggests that she was intoxicated at the time and not aware of the significance of her action. Because contracts made by an intoxicated person are voidable at the option of the intoxicated party, Kira has a good chance of recovering the necklace.13–3A.DisaffirmanceNo. Contracts entered into by a minor are voidable at the option of the minor. The minor has the choice of disaffirming the contract and setting aside all legal obligations arising from it. For a minor to exercise the option to avoid a contract, he or she need only manifest an intention not to be bound by it. The minor avoids the contract by disaffirming it. Words or conduct may serve to express the intent. The contract may be disaffirmed at any time during minority or for a reasonable time after the minor comes of age. It is important that disaffirmance be timely.The waiver of liability in this set of facts is a contract between Monster Mountain and a minor—J.T. A contract with a minor is voidable. To disaffirm the contract, the minor only needs to show an intent not to be bound by it. J.T.’s suit against Monster Mountain, seeking to hold the park liable for negligence, is conduct that serves to express that intent. Thus, the waiver does not bar J.T.’s claim.In the actual case on which this problem is based, the court held that any contract made with J.T., including Monster Mountain’s liability waiver, was voidable.13–4A.Business Case Problem with Sample Answer—Unconscionable contracts or clausesIn this case, the agreement that restricted the buyer’s options for resolution of a dispute to arbitration and limited the amount of damages was both procedurally and substantively unconscionable. Procedural unconscionability concerns the manner in which the parties enter into a contract. Substantive unconscionability can occur when a contract leaves one party to the agreement without a remedy for the nonperformance of the other.Here, GeoEx told customers that the arbitration terms in its release form were nonnegotiable and that climbers would encounter the same requirements with any other travel company. This amounted to procedural unconscionability, underscoring the customers’ lack of bargaining power. The imbalance resulted in oppressive terms, with no real negotiation and an absence of meaningful choice. Furthermore, the restriction on forum (San Francisco) and the limitation on damages (the cost of the trip)—with no limitation on GeoEx’s damages—amounted to substantive unconscionability.In the actual case on which this problem is based, the court ruled that the agreement was unconscionable.13–5A.Mental incompetenceNo. Contracts made by mentally incompetent persons can be void, voidable, or valid. Mentally incompetent persons not previously so adjudged by a court may enter voidable contracts if they do not know they are entering into a contract or if they lack the mental capacity to comprehend its subject matter, nature, and consequences. Whenever there is no prior adjudication of mental incompetence, most courts examine whether the party was able to understand the nature, purpose, and consequences of his or her act at the time of the transaction.In this problem, Dorothy suffered from dementia and chronic confusion at the time that the residency agreement was executed. In fact, she needed an assisted living facility precisely because she was unable to manage her own affairs, including decisions about medical and financial matters. Under other circumstances, a party who accepts services and living quarters—as Dorothy did—can be said to have accepted the benefits of the agreement and thus manifested assent. Here, however, Dorothy’s acceptance of benefits cannot amount to assent to a contract, because she lacked the capacity to give her assent.In the actual case on which this problem is based, the court denied the facility’s request to compel arbitration.13–6A.Licensing statutesWhether a contract with an unlicensed person is legal and enforceable depends on the purpose of the statute. If the purpose is to protect the public from unauthorized practitioners, then a contract involving an unlicensed practitioner is generally illegal and unenforceable.This problem indicates that the applicable licensing statute was intended to protect the public from unauthorized, unlicensed practitioners. PEMS did not have a broker’s license. Thus, if PEMS was acting as a broker, the unlicensed firm forfeited its right to collect a commission for its services. The statutory definition of a broker includes any person who deals with the sale of a business. It seems clear that this definition encompasses PEMS. Using PEMS’s services, an investment group made a successful purchase of Rupp. Therefore PEMS is barred from maintaining this suit to collect the unpaid commission.In the actual case on which this problem is based, the court dismissed PEMS’s claim on the ground that the unlicensed firm was acting as a broker.13–7A.MinorsNo, a minor does not so lack the capacity to contract that he or she cannot enter into a binding settlement without court approval. The general rule is that a minor can enter into any contract an adult can, unless the contract is prohibited by law for minors (for example, the sale of tobacco or alcoholic beverages). A contract entered into by a minor, however, is voidable at the option of that minor. An adult who enters into a contract with a minor cannot avoid his or her contractual duties on the ground that the minor can. Unless the minor exercises the option to disaffirm the contract, the adult party normally is bound by it.In this problem, it is clear that a contract existed at the time of D.V.G.’s death. As a minor, she did not lack the capacity to enter into a binding settlement of her potential claims. She would not have been liable on the contract, however, if she had chosen to avoid the deal. But she was the only party to the settlement that had this option. At the time that the settlement was agreed to, the contract was binding on Nationwide, notwithstanding that it was voidable at D.V.G.’s option.In the actual case on which this problem is based, Nationwide asked a federal district court to declare that there was no settlement. The question was certified to the Alabama Supreme Court, which held that Nationwide was bound to the agreement.13–8A.Adhesion contractsDesgro’s complaint was filed too late—the contract’s twelve-month limit was enforceable. Standard-form contracts often contain fine-print provisions that shift a risk ordinarily borne by one party to the other or otherwise impose limitations on claims and disputes. Many businesses use such contracts. Life insurance policies, residential leases, loan agreements, and employment agency contracts are often standard-form contracts. To avoid enforcement of the contract or of a particular clause, a plaintiff normally must show that the contract or particular term is unconscionable.In this problem, Pack had Desgro sign a standard-form contract that included a twelve-month limit for claims based on the agreement. But this standard-form contract was not an unconscionable adhesion contract because Desgro did not have to take it or leave it, nor was he forced to agree to its terms to get the house inspected. He might have bargained with Pack over the terms. Or he might have simply contacted another inspection service to do the work. Thus, Desgro was bound to the terms of the contract with Pack, including the twelve-month limit on claims based on the agreement.In the actual case on which this problem is based, the court issued a judgment in Pack’s favor, and a state intermediate appellate court affirmed, on the basis of the twelve-month limit.13–9A.A Question of Ethics—CapacityNo party should be allowed to benefit from another party’s lack of contractual capacity—the legal ability to enter into a contractual relationship. Contracts entered into by persons lacking the contractual capacity to do so may not be enforced. Courts generally presume the existence of contractual capacity.Factors that may affect the capacity to form an enforceable contract include intoxication. If a person was sufficiently intoxicated to lack mental capacity, a contract entered into by the intoxicated person is voidable at the person’s option. For the contract to be voidable, it must be proved that the intoxicated person’s reason and judgment were impaired to the extent that he or she did not comprehend the legal consequences of entering into the contract. Intoxication may occur through the ingestion of drugs, including medication prescribed following surgery.The facts in this problem do not raise any question of Riley’s capacity during his meeting with Suthoff, despite his being in the hospital and on pain medication at the time. Riley answered every question that Suthoff posed clearly and accurately. There is no proof that his reason and judgment were impaired to the extent that he or she did not comprehend the legal consequences of signing the consent form. Thus, the consent form is not voidable at his option on the ground of incapacity.Ethics focuses on morality and the way in which moral principles apply to conduct in daily life. Ethics concerns the rightness or wrongness of an action. Just as no party should be allowed to benefit from another party’s lack of contractual capacity, no party should be allowed to avoid a contract by falsely claiming that he or she lacked capacity when the contract was entered into. A false claim generally indicates a lack of ethics. If Riley filed his suit solely because a successful outcome would increase the amount of his recovery, regardless of the truth of his claim, then it would appear he showed a lack of ethics.In the actual case on which this problem is based, the court issued a judgment in favor of the insurance adjuster.Critical Thinking and Writing Assignments13–10A.Business Law Critical Thinking Group Assignment1.A covenant not to compete can be part of an employment contract. Such an agreement is legal so long as the specified period of time is not excessive in duration and the geographical restriction is reasonable—no greater than necessary to protect a legitimate business interest. Such interests include the protection of trade secrets (customer lists, marketing plans, and the like) and other intellectual property.2.A covenant not to compete that does not protect a legitimate business interest or is greater than necessary to protect that interest will not be enforced, because it unreasonably restrains trade and is contrary to public policy.3.A covenant not to compete clause would be unreasonable if there are no limits to its duration and no restrictions on its geographical reach. These flaws would also make the clause unconscionable. Although a court may resort to contract reformation only when necessary to prevent undue burdens or hardships—because reformation implicitly makes the court a party to the contract—it would be reasonable for a court to either strike or reform such a clause. ................
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