Contracts

1. Contracts Capacity and Legality Statute of Frauds Drafting Tips Class 2

2. Legality of the Contract • An illegal contract is void • A contract is illegal if: • It violates a federal or state statute • It violates public policy

3. Governing Statutes • Many statutes prohibit certain contracts or contract terms • Some of these are: • Gambling statutes • Insurance statutes and regulations • Usury statutes • Consumer protection statutes • Statutes protecting vulnerable individuals

4. Gambling in Washington • Gambling is authorized or criminalized by RCW 9.46. • Certain kinds of gambling activities are authorized. • Some Bingo • Fishing Derby • Charitable chance • State lottery • Tribal Gaming http://apps.leg.wa.gov/RCW/default.aspx?cite=9.46

5. Insurance – a wager? • Life insurance • Requires insured to have an insurable interest in the subject of the policy • The objection to these policies “was not the temptation to murder but the fact that such wagers came to be regarded as mischievous kind of gaming.” • In re Estate of D’Agosto, 134 Wn. App. 390 (2006)

6. Usurious Contracts • Usury laws prohibit charging excess interest on loans. • Excess interest is generally defined in the statute.

7. Usury in Washington • Washington’s usury statute is RCW 19.52 • Although limits are set on certain loans, many others are exempt from the usury rates. http://apps.leg.wa.gov/RCW/default.aspx?cite=19.52.020 • RCW 19.52.030 permits enforcement of usurious contracts, but only allows the creditor to collect the principal – less twice the interest paid and minus the accrued but unpaid interest. Attorneys fees and costs also are assessed against the creditor.

8. Licensing Statutes • Statutes to Protect the Public: Only licensed practitioners/providers may enforce a contract • Regulatory or Revenue Statutes: Contract with an unlicensed individual is generally enforceable.

9. Public Policy Violations • If there is no statute that prohibits what a court determines to be offensive contract terms, the court may refuse to enforce the contract if, based on common law principles, it violates “public policy"

10. Restraint of Trade • Restraint of Trade • Free trade is the basis of the American economy and any bargain not to compete is suspect and, generally, unenforceable. There are two common exceptions: • Sale of a business • Employment

11. Sale of a Business • The buyer of an existing business may ask the seller to agree not to compete with the business. This agreement is enforceable if it is reasonable: • In Time • Geographic Area • Scope of Activity

12. Employment Clauses • A noncompetition clause in a contract for employment is generally enforceable if it is essential to the employer, fair to the employee, and harmless to the general public.

13. Washington Law • Washington courts will enforce noncompete clauses if they are validly formed (i.e., supported by consideration), are of legitimate concern to employer’s business, and are reasonable as to • Time • Geographic limits • Scope of Activity Labriola v. Pollard Group, Inc., 152 Wn.2d 828 (2004)

14. Exculpatory Clauses • Basically a contract that releases one of the parties from liability if the other party is injured. • Generally unenforceable only if: • Attempts to avoid liability for intentional torts or gross negligence • Parties have greatly disparate bargaining power • Clause is not clearly written or visible

15. Bailments Exculpatory clauses in contracts for bailments are generally enforceable - if they are reasonable, clear and obvious

16. Unconscionable Contracts • An unconscionable contract is one that the court refuses to enforce because of fundamental unfairness. • A contract is unconscionable if it one that “no man in his senses and not under delusion would make . . . and no honest and fair man would accept.”

18. Contractual Capacity • Legal ability to enter into a contract. • Courts presumethe existence of contractual capacity.

19. Contractual Capacity • The bases for showing lack of capacity to enter into a contract are: • Minority • Intoxication • Mental incompetence

20. Contracts with Minors • What is a minor? – In most states the age of majority for contracting is 18 years old. • RCW 26.28.015(4) (A person age 18 years shall be deemed to be of full age for the purpose of entering into any legal contractual obligation and to be legally bound thereby to the full extent as any other adult person.)

21. Disaffirmance by the Minor • A minor may disaffirm – or rescind – the contract • If the disaffirmance is timely and • If the minor returns the consideration received – to the extent possible.

22. Ratification by the Minor • After becoming an adult, the minor may ratify the contract. If the contract is ratified, it is enforceable.

23. Mental Impairment • A contract with a person who has a mental impairment is governed by the same principles that apply to a contract with a minor – the incapacitated person may either disaffirm the contract or ratify it.

24. Intoxication • The general rule is that intoxication is not a defense to enforcement of a contract. • However, if intoxication results in an inability to have the requisite mental capacity to make a contract, then the contract is voidable. • This is a very high burden.

25. Intoxication • A party may use the excuse of intoxication to avoid a contract only if he can show: • He was so intoxicated at the time of entering into the contract that he could not understand the nature of his transaction and • The other party had reason to know that this was the case.

26. Other Defenses • A court may refuse to enforce a contract if the assent to the agreement was not genuine. Genuine assent may be lacking because of • Misrepresentation and Fraud • Mistake • Undue influence • Duress

27. Fraud/Misrepresentation • Fraud is the intentional misrepresentation of material facts under circumstances in which the defrauding party expects the other party to rely on the misrepresentation to that party’s detriment. There must be proof of: • Misrepresentation of a material fact • An intent to deceive • Justifiable reliance on the deception

28. Concealment • Concealment is an intentional fraud plus an overt act designed to further the fraud, such as hiding a flaw in property for sale. • Concealment is more than just nondisclosure.

29. Innocent Misrepresentation • Misrepresentation is the unintentional deception of another party. • Contracts based on innocent misrepresentation are voidable. • The deception must involve a material fact • The fact must be within the exclusive knowledge of the person making the misrepresentation and not reasonably available to party deceived.

30. Mistake • There are two kinds of mistakes • Bilateral (or mutual) • Unilateral

31. Undue Influence • Exists where there is a confidential or fiduciary relationship between the contracting parties and where one of the parties is in a position of trust or domination. • The complaining party must show (1) that the other abused his or her position of trust to (2) influence the vulnerable party to enter into the contract.

32. Duress • If a party enters into a contract involuntarily – because the party was forced to agree – the contract is voidable at the option of the party who was coerced. • Duress must be so great that the party coerced lost his or her ability to make a free choice.

33. Statute of Frauds • Some contracts are required to be in writing to be enforceable: • Interests in land • Made by an executor of an estate • To pay the debt of another • Cannot be performed in one year • Made in consideration of marriage • For sale of goods worth more than $500

34. Washington’s Statute of Frauds • We have a number of statutes that require contracts to be in writing. • RCW 19.36.010 (General statute) • RCW 64.04.020 (Deeds) • RCW 62A.2-201 (Sale of goods over $500) • RCW 62A.2A-201 (Lease of goods over $1000)

35. Sufficiency of the Writing • The contract or memorandum of contract • Must be signed by the party to be charged (i.e., the party resisting enforcement) • Must state with reasonable certainty • The names of the parties • The subject matter of the agreement • All essential terms and promises

36. Consequences • If an agreement violates the statute of frauds it is unenforceable. • Exceptions: • Full performance by one of the parties • Partial performance by the person seeking enforcement (payment of part of the price, moving onto land, making improvements) • Promissory Estoppel • Admission the contract was made

37. The Writing • Once written, the contract defines the relationship between the parties. • If reduced to a signed, written document, intended to be the final, complete expression of the agreement, the parties generally will not be able to use extrinsic evidence to “explain” what they intended the contract to mean.

38. Parol Evidence Rule • When two parties make an integrated contract, neither one may use parol or extrinsic evidence to contradict, vary or add to its terms. • Unless: • The court determines the written agreement is incomplete or ambiguous • The contract was modified or • The evidence is used to prove a defense.

39. Contract Interpretation • How do courts interpret contracts? Frigaliment Importing v. B.N.S. Int’l Sales • http://www.youtube.com/watch?v=h_oMjHsmZ24&eurl=http://lawprofessors.typepad.com/contractsprof_blog/2009/01/i-am-chicken-he.html

40. Drafting Contracts • Don’t be afraid to start with a form • Use simple (non-legal) language • Be consistent throughout the contract • Make sure all essential terms are included in the contract • Review for inconsistencies and ambiguities • Review for contradictions

41. Drafting Contracts • The contract should be clear to the contracting parties. • It should be complete. • The terms and methods of enforcement should be clear.